The Franchise Memorandum

In a case litigated by Gray Plant Mooty, the United States District Court for the Western District of North Carolina recently granted a franchisor’s motion for a preliminary injunction to prevent a former franchisee from operating a competing business. In Outdoor Lighting Perspectives Franchising, Inc. v. OLP-Pittsburgh, Inc., 2012 U.S. Dist. LEXIS 53583 (W.D.N.C. Apr. 17, 2012), Outdoor Lighting Perspectives Franchising (“OLP”) sought a preliminary injunction to enforce the covenant against competition in the franchise agreement. The clause prevented the franchisee from operating a competing business within its or any other franchisee’s territory, or within a 100-mile radius of those territories, for a period of two years following termination or expiration.

The court held that OLP was likely to succeed on the merits of its claim. The court found that the covenant was reasonably necessary for the protection of OLP’s legitimate business interests because it protected OLP’s ability to refranchise the former franchisee’s territory and preserved the integrity of OLP’s system by demonstrating to other franchisees that OLP would enforce the covenant. The court also found that the two-year restriction was reasonable and that enforcing a valid non-compete prevented consumer confusion and unfair competition, which served the public interest. The court found injunctive relief to be appropriate because OLP would suffer irreparable harm to its goodwill in the form of lost customers and to its franchise system as a result of its inability to refranchise the territory. Finally, the court decided that the balance of equities tipped in OLP’s favor because the harm to the franchisee resulted from its decision to violate the covenant. While the court granted OLP’s motion, it decided that the 100-mile radius was more than was necessary and “blue penciled” the agreement by striking the 100-mile buffer and enforcing the covenant only within the franchisee’s former territory or another franchisee’s territory.

The same court upheld the same covenant, with the same modification, in OLP v. Home Amenities, Inc., 2012 U.S. Dist. LEXIS 5406 (W.D. N.C. Jan. 18, 2012) (appeal pending).