Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—4th Cir.: Non-competition and non-solicitation prohibitions unenforceable against former franchisee, (Nov 25, 2013)

By Linda O’Brien, J.D., LL.M.

The non-competition and non-solicitation clauses contained in a franchise agreement were not enforceable against an former franchisee of a paint restoration business because the restrictions were applicable when the franchise agreement was terminated before the natural expiration of it’s term , the U.S. Court of Appeals in Richmond has ruled (Hamden v. Total Car Franchising Corporation, November22, 2013, Per Curiam). However, the non-disclosure clause incorporated into the franchise agreement bound the franchisee into perpetuity.

Total Car Franchising (TCF) Corporation provided auto repair and restoration services with a focus on paint restoration and paintless dent repair. Devin Hamden, who worked for another TCF franchise as an apprentice, was offered the opportunity to become a TCF franchisee in 1996. Hamden and TCF executed a franchise agreement which set the term of the franchise at fifteen years with an option to renew and designated the metropolitan area that Hamden could provide services. The agreement also contained a post-term non-competition clause operational for two years after the termination of the agreement, during which Hamden was prohibited from participating in a paint restoration business.

Hamden and TCF contemporaneously executed a non-competition and confidentiality agreement which incorporated the franchise agreement by reference. The confidentiality agreement contained three restrictive covenants: non-competition; non-disclosure; and non-solicitation. First, if the franchise agreement was terminated before its expiration date or the franchisee transferred his interest in the franchise agreement, the franchisee promised not to engage in the same or similar type of business within a certain metropolitan area for a period of two years. Second, during the term of and after the termination of the franchise agreement, the franchisee agreed to never divulge any trade secrets or any proprietary or confidential information regarding the design, development, or operation of any business specializing in appearance technologies. Third, for two years after the termination of the franchise agreement, the franchisee agreed to not solicit TCF customers within a certain metropolitan area.

Hamden performed paintless dent repair as a TCF franchisee for the entirety of the fifteen year term. At the expiration of the term, Hamden informed TCF that he would not seek a renewal of the franchise agreement; instead, he would pursue his own business. TCF sought a declaratory judgment in district court. The district court held that the restrictive covenants in the confidentiality agreement did not bind Hamden and the post-term restriction in the franchise agreement applied only to paint restoration, not to the paintless dent report work performed by Hamden.

The appellate court, in affirming the district court in part, found that the covenants applicable to the termination of the agreement did not encompass the expiration of the agreement at the end of the fifteen year term. The terms “termination” and “expiration” were not necessarily analogous. Viewing the agreement as a whole, “termination” was the complete severance of the business relationship, where “expiration” was a formal termination on a closing date. The court determined that the non-competition and non-solicitation clauses of the confidentiality agreement and the post-term restriction in the franchise agreement indicated that the provisions applied if the agreement was terminated before the expiration date. Thus, those provisions were unenforceable against Hamden.

However, the non-disclosure clause of the confidentiality agreement contemplated the expiration of the agreement at the end of the fifteen year term and bound Hamden into perpetuity when he signed the franchise agreement. Therefore, the court reversed the district court in part and concluded that the prohibition against Hamden disclosing TCF’s proprietary and confidential trade secrets was enforceable.

The case is No. 12-2085.

Attorneys: Robert Edwin Dean, II (Frith & Ellerman Law Firm, P.C.) for Devin Hamden. Frank Kenneth Friedman (Woods Rogers P.L.C.) for Total Car Franchising Corporation.

Companies: Total Car Franchising Corporation

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