Restraint of trade provisions in franchise agreements: what you need to know

Franchise agreements are an essential part of the business of franchising. They allow franchisors to license their intellectual property, trademarks, and business model to franchisees, who then operate their own business using the franchisor`s brand name. However, franchise agreements are also often the source of tension between franchisors and franchisees, especially when it comes to restraint of trade provisions.

Restraint of trade provisions are clauses in a franchise agreement that limit the franchisee`s ability to operate a business that competes with the franchisor`s business. These provisions are meant to protect the franchisor`s investment and intellectual property, and to ensure that the franchisee does not use the franchisor`s business model to benefit a competitor. However, restraint of trade provisions can also be a source of tension between franchisors and franchisees, especially if the provisions are overly broad or restrictive.

There are several types of restraint of trade provisions that may appear in a franchise agreement. The most common types include non-compete provisions, which prevent the franchisee from operating a similar business within a certain geographic area for a certain period of time; non-solicitation provisions, which prevent the franchisee from soliciting the franchisor`s employees or customers; and confidentiality provisions, which prevent the franchisee from disclosing confidential information about the franchisor`s business.

Restraint of trade provisions are generally enforceable if they are reasonable in scope and duration, and if they are necessary to protect the franchisor`s legitimate business interests. However, courts will not enforce restraint of trade provisions that are overly broad or that unfairly restrict the franchisee`s ability to do business. For example, a non-compete provision that prevents a franchisee from operating any business within a 100-mile radius for 10 years would likely be considered unreasonable and unenforceable.

Franchisees should be aware of the restraint of trade provisions in their franchise agreements, and should carefully review them before signing. If a provision seems overly broad or unfair, the franchisee should negotiate with the franchisor to modify or remove it. Franchisees should also be aware of the potential consequences of violating a restraint of trade provision, which can include termination of the franchise agreement, damages, and injunctive relief.

In conclusion, restraint of trade provisions are an important part of franchise agreements, but they can also be a source of tension between franchisors and franchisees. Franchisees should be aware of the types of restraint of trade provisions that may appear in their franchise agreements, and should carefully review and negotiate them before signing. By doing so, franchisees can ensure that they are able to operate their businesses successfully, while also respecting the franchisor`s legitimate business interests.