Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DNJ: Franchisor of Lawn Care Businesses Awarded Declaratory Judgment Enforcing Valid Restrictive Covenant in Settlement Agreement with Terminated Franchisees, (Dec 12, 2012)

By Peter Reap, J.D., LLM

Lawn Doctor, Inc., a franchisor of lawn care businesses, was entitled to a declaratory judgment enforcing the valid restrictive covenant contained in a settlement agreement it entered into with Joseph and AnnaMaria Rizzo (collectively, the “Rizzos”), the terminated franchisees of a Florida franchise, the federal district court in Trenton, New Jersey, has decided (Lawn Doctor, Inc. v. Joseph Rizzo, December 11, 2012, Bongiovanni, T.). Furthermore, Lawn Doctor was entitled to a declaratory judgment that the irrigation services business currently operated by the Rizzos violated the covenant’s prohibition against the operation of any “Competitive Business.”

After it entered into a settlement agreement with the Rizzos following the termination of their franchise, Lawn Doctor asked the court to enforce the parties’ settlement agreement and issue a declaratory judgment that “irrigation services” fell within the definition of “Competitive Business” under the terms of the settlement agreement.

Enforcement of Settlement Agreement

A settlement agreement was a type of contract, the court noted. Consequently, courts looked to state contract law when determining whether an enforceable settlement agreement was reached. Under New Jersey law, an agreement to settle a lawsuit was a contract that, absent a demonstration of fraud or other compelling circumstances, should be honored and enforced as other contracts.

It was clear that the parties reached an enforceable settlement agreement, the court determined. Here, the parties agreed on the essential and material terms of their settlement.

As part of their settlement agreement, the parties additionally agreed that the terms of the restrictive covenant they negotiated (after an earlier ruling declared the original covenant in the parties’ franchise agreement overbroad) would last for 18 months from the date of the entry of the Consent Injunction. Further, they agreed that the term “Competitive Business” would retain the definition set forth in their franchise agreement. Specifically, the parties agreed that the term “Competitive Business” meant “[a]ny business which operates, or grants franchises or licenses to others to operate, a business for the establishment, care and conditioning of lawns or other vegetation or any related or ancillary services, including, but not limited to, trees, shrubbery and other plant life.”

While the parties did not discuss whether irrigation services fell within the scope of the definition of “Competitive Business,” and thus whether such services would be prohibited under the restrictive covenant, their failure to do so in no way changed the fact that the parties entered into a binding and enforceable settlement. The parties’ failure to address whether irrigation services would be a prohibited activity under the restrictive covenant did not establish that there was no meeting of the minds between Lawn Doctor and the Rizzos. The fact that their settlement agreement failed to contain every possible contractual provision to cover every contingency did not render it less enforceable, according to the court.

The Declaratory Judgment Act

Pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201, “in a case of actual controversy within its jurisdiction . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.”

An actual, justiciable controversy existed between Lawn Doctor and the Rizzos, the court ruled. Specifically, there was “a real and substantial controversy” regarding whether the Rizzos were violating the terms of the parties’ settlement agreement by operating an irrigation services business in Florida. As such, the court would exercise its discretion to “declare the rights and other legal relations” of Lawn Doctor and the Rizzos on this issue under the Declaratory Judgment Act.

The Restrictive Covenant

Giving the term of the settlement agreement their plain and ordinary meaning, it was clear that an irrigation services business was a “Competitive Business” prohibited by the parties’ settlement agreement, the court held. While the Rizzos suggested that irrigation services would only fall within the scope of the phrase “Competitive Business” if every term comprising its definition was given its broadest possible meaning, that was simply not the case, the court stated.

Indeed, Lawn Doctor was not, as the Rizzos noted, attempting to prevent them from working in a pizzeria, an activity that could theoretically be prohibited by the restrictive covenant in light of the fact that in working in a pizzeria the Rizzos could be tasked with caring for the condition of tomatoes and basil (other types of vegetation). Nor was Lawn Doctor seeking to prevent the Rizzos from working in a coffee shop where they could theoretically breach the terms of the restrictive covenant by working with coffee beans and tea leaves (providing services that involved other plant life). Instead, Lawn Doctor was seeking to prevent the Rizzos from operating a lawn irrigation services business.

Irrigation services were not tangentially related to the “establishment, care and conditioning of lawns.” Instead, they clearly fell within the plain and ordinary meaning of those terms, the court ruled. The Rizzos did not provide any real argument to the contrary. Instead, they focused on the fact that Lawn Doctor did not provide irrigation services to customers as part of its comprehensive lawn care package, irrigation services were not mentioned in the parties’ original franchise agreement, the Rizzos never provided irrigation services as franchisees of Lawn Doctor and the inclusion/exclusion of irrigation services from the applicable restrictive covenant was not discussed when the parties reached their settlement agreement.

The fact that the parties failed to address whether irrigation services would be prohibited by the restrictive covenant was irrelevant, according to the court. The parties did not have to account for every possible contractual provision to cover every contingency in order to enter into a binding and enforceable settlement.

Similarly, the fact that the Rizzos never provided irrigation services to customers when they operated their Lawn Doctor franchise and the fact that Lawn Doctor did not generally provide those services to customers was a “non-starter,” the court determined. The Rizzos’ restrictive covenant was not limited to lawn care and conditioning services actually provided by Lawn Doctor.

The Rizzos also suggested that the restrictive covenant should not be enforced as written but should be limited to protect only Lawn Doctor’s legitimate interests. They argued that Lawn Doctor’s need for protection should be narrowly construed. Further, they claimed that since Lawn Doctor’s interest in preventing the Rizzos from operating an irrigation services business did not “rise to the level of a proprietary interest deserving of judicial protection,” the court should conclude that the “‘restrictive covenant merely stifles competition and therefore was unenforceable.’”

Under New Jersey law, where reasonable, covenants not to compete were valid and enforceable. A restrictive covenant would generally be found to be reasonable where it simply protected the legitimate interests of the employer, imposed no undue hardship on the employee, and was not injurious to the public. Furthermore, unlike restrictive covenants contained in the context of employment contracts, restrictive covenants in the franchise context were afforded additional latitude. Because a covenant not to compete in a franchise relationship was similar to a covenant not to compete ancillary to the sale of a business, such covenants were freely enforced under New Jersey law.

Lawn Doctor had a legitimate interest in protecting its trade secrets, confidential information, customer relationships, and its good will, the court decided. Further, the restrictive covenant contained in the parties’ settlement agreement protected these interests. While Lawn Doctor never provided irrigation services in the Rizzos’ franchise territory, or even provided irrigation services within 1,500 miles of the Rizzo’s franchise territory, that did not alter the fact that preventing the Rizzos from operating such a business helped Lawn Doctor protect its customer relationships and its good will. As such, Lawn Doctor was not simply trying to enforce a restrictive covenant to stifle competition. Instead, it was attempting to protect its good will and customer relationships, legitimate interests that it was entitled to protect.

While the Rizzos’ ability to earn a living providing lawn care services, including irrigation services, would certainly be impacted by the enforcement of the parties’ restrictive covenant, the covenant did not impose an undue hardship on them, the court held. The court was mindful of the fact that the Rizzos not only agreed to the definition of “Competitive Business” when they first entered the franchise agreement, but also did so again just recently when they agreed to settle this matter. Further, the restrictive covenant was reasonable because it lasted only 18 months and only prevented the Rizzos from providing lawn care services, including irrigation services, within 50 miles of the Rizzos’ former territory or within any territory granted by Lawn Doctor to another franchisee.

Finally, the restrictive covenant was not injurious to the public. Undoubtedly, there were plenty of lawn care business in the relevant geographic area who could provide lawn care services, including irrigation services, to the public. Consequently, the restrictive covenant as written was valid and enforceable and Lawn Doctor was entitled to a declaratory judgment that the Rizzos’ irrigation services business violated same.

The case is Civil Action No. 12-1430 (TJB).

Ross Schmierer (Paris Ackerman & Schmierer LLP) for Lawn Doctor, Inc. Paul I. Perkins (Lynch Lynch Held Rosenberg & Perkins, PC) for Joseph Rizzo.

Cases: FranchisingDistribution NewJerseyNews