Last month the United States District Court for the District of New Jersey granted franchisor Jackson Hewitt Inc.’s (“JHI”) motion for summary judgment against a former franchisee, finding that the franchisee had clearly violated the post-termination covenant not to compete in his franchise agreement and enjoining him from further competition for a period of 24 months. Jackson Hewitt Inc. v. Childress, 2008 WL 199539 (D.N.J. Jan. 22, 2008).
The franchisee had operated two JHI franchises in Alabama for four years before notifying the company of his intention to cease operations and immediately start up his own accounting and tax preparation business. He did so, opening his own business the next day in the same building where he had previously run his JHI franchise. JHI’s franchise agreement contained a non-compete clause restricting former franchisees from competing within a 10-mile radius of their former JHI business and requiring them to return manuals and other trade secret information.
Applying New Jersey law as chosen by the parties in the franchise agreement, the court found that the franchisee was clearly operating a competing business in violation of his JHI franchise agreement, likening covenants not to compete in franchise agreements to agreements ancillary to the sale of a business. Citing to Jiffy Lube Int’l, Inc. v. Weiss Bros., Inc., 834 F. Supp. 683, 691 (D.N.J. 1993), the court noted that “[u]nlike the sale of a business, however, once the franchise relationship terminates, the good will is conveyed back to the franchiser.” The court also held that franchisee had failed to return JHI’s confidential and proprietary information, and entered an order enjoining him from competing against JHI for a period of 24 months and requiring him to return JHI’s proprietary information. It rejected the franchisee’s defense that JHI had improperly induced him into signing the franchise agreement, noting that the integration clause and disclaimers in the agreement made his argument “frivolous.”
The case is yet another example of how a carefully drafted franchise agreement can protect franchisors from post-termination competition.
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