The Franchise Memorandum

A federal court in Texas has denied Penthol’s claim for breach of contract against Vertex Energy for the improper sale of competing products in violation of noncompete clause. Penthol, LLC v. Vertex Energy Operating, LLC, 2024 WL 987568 (S.D. Tex. Mar. 7, 2024). The court found that the allegedly competitive products were not covered by the noncompete agreement, were not interchangeable, and that research and development of related products that were never sold was not prohibited. Penthol, a distributor of base oil products, alleged that Vertex violated a noncompete clause in the parties’ Sales Representative and Marketing Agreement wherein Vertex agreed it would not “sell, market, advertise, promote, solicit the sale of or offer to sell any product that competes with the Product procured or sourced by Penthol.”

The case advanced to trial, after which the court issued its Findings of Fact and Conclusions of Law and rejected Penthol’s three-pronged theory of breach. The court found that the technical specifications of Vertex’s allegedly competitive product failed to meet the narrow “requirements of a competing product” under the sales agreement. The court also found that Vertex’s research and development of a related product did not result in a breach, finding that “Vertex never made an economically viable or consistent Group III base oil” sufficient to violate the agreement and never tried to sell such a product. Finally, the court rejected Penthol’s third theory, that Vertext marketed, promoted, and sold a product that, theoretically, could be interchanged by customers for Penthol’s product because as a practical matter, “it would not make sense” to use the purportedly interchanged product for the purpose that Penthol alleged. The court denied Penthol’s breach of noncompete contract claims.