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Covenant Against Competition in Consultant Agreement Does Not Violate Sherman Act
Posted in Antitrust

Mary Kay sued a former national sales director (the next level up from a Mary Kay consultant) for enforcement of a contractual covenant against competition. The director, Amy Dunlap, in turn brought a counterclaim against Mary Kay. Dunlap alleged that Mary Kay had violated Texas’s Deceptive Trade Practices Act (DTPA) and further claimed that the noncompete agreement was an illegal restraint of trade under the Sherman Act. In Mary Kay, Inc. v. Amy Dunlap, 2012 U.S. Dist. LEXIS 86499 (N.D. Tex. June 21, 2012), the court addressed Mary Kay’s motion to dismiss Dunlap’s counterclaims.

In analyzing the DTPA claim, the court held that the DTPA only applies where there is (a) a consumer, who is (b) seeking or acquiring goods or services. The court began by analyzing the crux of the relationship, and found that under the Mary Kay Agreement, the “objective…is to provide Dunlap various intangible rights and privileges as a [director]; the objective is not to provide her with the facilities, equipment, or other necessary goods and services to operate a business as would a common franchisee.” Although Dunlap might be able to argue that she acquired goods and services from Mary Kay, the court found that “Dunlap’s allegations are still inadequate to show that she is a DTPA consumer… because the goods or services allegedly acquired do not form the basis of the complaint.”

As for the Sherman Act claim, Dunlap alleged that the noncompete vertically restrained trade by prohibiting Mary Kay consultants from participating in selling “cosmetic products similar to [Mary Kay’s] line of cosmetic products, particularly in, but not limited to, the Texas market.” The court dismissed this claim, stating that “[s]uch broad descriptions do not contain the factual specificity required for the court to draw the reasonable interference that Mary Kay is liable for the misconduct alleged.” The court therefore granted Mary Kay’s motion to dismiss both counterclaims.

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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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