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Agreement Partially Enforced in New York, Despite Argument That Franchisor Failed to Provide Proper Sales Disclosure to Franchisee

A federal district court in New York enforced part of a noncompete covenant that existed between a franchisor and former franchisee, finding some of the provision overly broad and only enforcing the aspects necessary to protect the franchisor's legitimate business interests. Mister Softee, Inc. v. Tsirkos, 2014 U.S. Dist. LEXIS 77434 (S.D.N.Y. June 5, 2014). In moving for a preliminary injunction, Mister Softee sought, among other things, enforcement of covenants that barred former franchisee Tsirkos from competing in former and other franchise territories throughout four boroughs of New York City and all of Long Island for two years after the termination of the franchise. In addition to challenging the scope of the prohibition, Tsirkos' primary defense was that the underlying franchise agreement was unenforceable under New York law because Mister Softee did not provide him a prospectus before the franchise was sold.

Noncompete covenants are upheld in New York to the extent they are reasonable in time and area, necessary to protect legitimate interests of the beneficiary, not harmful to the general public, and not unreasonably burdensome to the restricted party. The court concluded that restricting competitive activity within Tsirkos' former territories and the surrounding area protects a legitimate business interest of Mister Softee. The court, however, did not find any legitimate business interests requiring a restraint outside of Tsirkos' former territories and nearby areas. Those areas have other ice cream businesses, and the court did not find that the particular training, sales method knowledge, or other experience gained by Tsirkos as a result of the franchise agreement created an unfair competitive advantage in those areas. Rather, the competitive advantage Tsirkos gained as a result of the franchise agreement only existed in the locations where Tsirkos obtained particularized customer knowledge or goodwill. As to the defense that Mister Softee failed to provide a prospectus before selling the franchise, the court was unsympathetic, as Mister Softee had made the prospectus available to Tsirkos and he rejected the document, saying he "knew everything about the system." Therefore, the court only enforced the noncompete covenant within a five-mile radius of Tsirkos' former franchise territory.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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