The Franchise Memorandum

The Fourth Circuit affirmed in part the decision of the Western District of Virginia that certain post-term restrictive covenants did not apply to a former franchisee, finding that the expiration of the franchise agreement did not constitute a termination. Hamden v. Total Car Franchising Corp., 2013 U.S. App. LEXIS 23514 (4th Cir. Nov. 22, 2013). Former franchisee Hamden operated a paintless dent repair business for the entire fifteen year term of his franchise agreement. Electing to not renew the Franchise Agreement, Hamden informed Total Car Franchising (“TCF”) that he would pursue his own business. After TCF notified Hamden that it would pursue an injunction preventing such conduct, Hamden sought a declaratory judgment from the district court. The district court held that the term “termination,” as used in the franchise agreement and a Non-Competition & Confidentiality Agreement, did not encompass the natural expiration of the franchise agreement; thus, the restrictive covenants contained in the agreements were not binding on Hamden. TCF challenged this holding on appeal.

The Fourth Circuit affirmed the district court’s ruling, reasoning that the express language of the franchise agreement required some affirmative act to constitute a termination and TCF failed to include any language in the agreement indicating that termination also arises passively through expiration. Further, the language contained in the parties’ confidentiality agreement contemplated that the restrictive covenants would be triggered if the franchise agreement was terminated prior to expiration. As a result, the Fourth Circuit upheld the district court’s decision that certain restrictive covenants were not enforceable against Hamden. But the circuit court reversed the lower court’s decision relating to restrictive covenants that applied during and after the term of the franchise agreement irrespective of how the franchise relationship ended.