Contract – Franchise – Civil Practice – Preliminary Injunction – Covenant Not to Compete – Return of Materials

Outdoor Lighting Perspectives Franchising, Inc. v. Harders (Lawyers Weekly No. 12-15-0547, 18 pp.) (James L. Gale, J.) 2012 NCBC 26

Holding: The covenant not to compete in the parties’ expired franchise agreement is written so broadly that it is unenforceable. Nevertheless, the agreement clearly requires the ex-franchisee to return certain materials to the franchisor upon termination of the agreement.

The plaintiff-franchisor’s motion for a preliminary injunction is denied as to the covenant not to compete and granted as to the return of franchise materials.

Section 14.2(a) of the parties’ franchise agreement prohibited the defendant-franchisee from engaging in any activity “to be used or employed in any business operating in competition with an outdoor lighting business or any business similar to the Business (“Competitive Business”) as carried on from time to time….” The agreement defines “Business” and “Outdoor Lighting Business” (when capitalized) to mean “the business operations conducted or to be conducted by the Franchisee consisting of outdoor lighting design and automated lighting control equipment and installation services, using the Franchisor’s System and in association therewith the Marks.” “System” means “the standards, systems, concepts, identifications, methods and procedures developed or used by the Franchisor … for the sales and marketing of the Franchisor’s Products … and Services….”

Section 14.2(b) is the post-termination non-compete provision: “Upon termination or expiration … transfer, sale or assignment of this Agreement by the Franchisee, neither the Franchisee, the operating manager or the Franchisee’s owners will have any direct or indirect interest (i.e. through a relative) as a disclosed or beneficial owner, investor, partner, director, officer, employee, consultant, representative or agent, for two (2) years, in any Competitive Business within 100 miles of the Territory or any other franchisee’s Franchisor’s or Affiliates territory.”

There is tension between the agreement’s definitions. The scope of “Business” or “Outdoor Lighting Business” is defined in reference to the operations conducted by the individual franchisee, which may or may not be coextensive with the franchisor’s overall operations. The franchisor’s overall operations, however, define the scope of the “System,” and such operations may be broader than those conducted by the individual franchisee in its “Business.”  “Competitive Business” is much more broadly stated than “Business.” “Competitive Business” extends to any business in competition with an outdoor lighting business or any business “similar to” the defined term “Business.”  “Competitive Business” then is broader than the franchise “System,” “Products,” and “Services.”

“Competitive Business” thus reaches beyond the outer limits of N.C. court decisions upholding restrictive covenants. The court concludes that it falls within those cases which prohibit unreasonable restrictions on competition.  Furthermore, the overbreadth cannot be cured by “blue penciling” as the court cannot substitute “Business” for “Competitive Business” without rewriting the agreement.

The covenant goes beyond business in which the franchisee itself was involved and transcends the business plaintiff can legitimately protect.

The court will not enforce the covenant to foreclose defendants from the entire field of outdoor lighting or any business that competes with an outdoor lighting business or a “similar” business. That is the only choice the definition of “Competitive Business” gives the court.

Plaintiff has not shown a probability of success in enforcing the covenant in § 14.2(b). The motion to enjoin defendants from violating that provision is denied.

As to materials that the franchise agreement required the franchisee to return to the franchisor post-termination, plaintiff has shown a likelihood of success on the merits and irreparable harm sufficient to warrant a preliminary injunction requiring defendants to return such materials to plaintiff.

Motion granted in part, denied in part.