The Franchise Memorandum

In Atlanta Bread Company International, Inc. vs. Lupton-Smith et al., 2008 WL 2264863 (Ga. Ct. App. June 4, 2008), the Georgia Court of Appeals affirmed the trial court’s grant of summary judgment holding that the in-term and post-term non-compete covenants in the franchise agreements between Atlanta Bread Company International, Inc. (“ABCI”) and various companies owned by Sean Upton-Smith were unenforceable. The in-term non-compete covenant prohibited Upton-Smith from owning or engaging in any “bakery/deli business whose method operation is similar to that employed by store units within the System”. The post-term non-compete covenant prohibited Smith from engaging in a “Competing Business” within 20 miles of any Atlanta Bread Company® store for one year.  

In January 2006, Smith opened a “PJ’s Coffee & Lounge” franchise under a franchise agreement with PJ’s Coffee USA. A month later, ABCI terminated Smith’s franchise agreements alleging a breach of the in-term non-compete covenant by operating the “PJ’s Coffee & Lounge” store. ABCI then sought to enforce the post-termination non-compete covenant.

The court of appeals affirmed the lower court’s ruling that the in-term non-compete was not enforceable because it was not limited to a specific territory and “Competing Business” was not described with sufficient particularity.  Further, the court held that because the in-term non-compete covenant was invalid, the post-termination non-compete covenant was also invalid. Under Georgia law, if one part of a non-compete provision is unenforceable, the entire non-compete provision is unenforceable. Even if the in-term non-covenant was valid, it is unlikely that the court would have found the post-term non-compete valid because it prohibited Upton-Smith from competing within 20 miles of any Atlanta Bread Company® store. Since the location of the stores was not known at the time Smith signed the franchise agreement, the non-compete lacked the required specificity under Georgia law.