A district court in Georgia recently granted a Motion for Preliminary Injunction filed by HOA Franchising, LLC’s, the franchisor of the Hooters restaurant chain (“Hooters”), against one of its former restaurant franchisees, MS Foods, LLC (“Franchisee”), but in doing so “blue-penciled” the Hooter’s post-term restrictive covenant to narrow the geographic limitations on the Franchisee.
The Franchisee was terminated by Hooters for repeated defaults, including failing to meet operational standards, failing to pay amounts due to satisfy Franchisee’s indemnification obligations under the franchise agreement, and engaging in an unauthorized transfer. The court granted Hooters request to enjoin the Franchisee from operating a Hooters restaurant, using the Hooters marks, operating any competitive business within a three-mile radius of the restaurant location, and making any representations about being associated with Hooters. However, the Georgia federal district court “blue-penciled” the portion of the post-term non-competition provision in the franchise agreement to the extent that it prohibited the former Franchisee from operating any competitive business in any “any other territory of Plaintiffs’ franchisees or affiliates.”
The court found that Hooters established a substantial likelihood of success on the merits of its cases given the large amount of uncontroverted evidence in support of the multiple contract breaches by the Franchisee. The court also found that Hooters had a legitimate business interest in enforcing the non-compete and it was reasonable in scope and duration. The court, however, rejected Hooters’ assertion that the non-compete was reasonable in geographic scope. First, Hooter’s non-compete failed to specify the other franchisees or affiliates whose territories were protected by the restriction. In other words, it failed to contain language restricting the provision to only those franchisees or affiliates in existence at the time of the termination of the franchise agreement. Further, the provision failed to define the size of the protected territory of any other franchisee or affiliate. Because the court was unable to accurately assess whether the total distance encompassed by the provisions of the non-compete covenant was reasonable, the court “blue-penciled” the provision and excised this geographic restriction prohibiting the Franchisee from competing in or around the territories of other Hooters, before otherwise granting the preliminary injunction against the Franchisee.
Most franchise agreements prohibit a franchisee, post-termination or expiration of the franchise agreement, from operating a competitive business within a certain mile radius of the location where its franchise unit operated. The provision is often expanded to prohibit competition around other franchised or company-owned outlets as well. Because Hooter’s provision failed to specify the real scope of that additional restriction, the court failed to enforce it. This case provides a lesson for legal practitioners drafting restrictive covenants in franchise agreements to make sure the geographic scope of the restriction is calculable by a court in the event of a dispute.