Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.C. App.: Overly restrictive non-compete agreement precluded injunctive relief, (Aug 9, 2013)

By Jody Coultas, J.D.

A trial court properly held that Outdoor Lighting Perspectives Franchising, Inc. could not enforce a non-competition agreement contained in a franchise agreement with Patrick Harders, a North Carolina court of appeals has held (Outdoor Lighting Perspectives Franchising, Inc. v. Harders, August 6, 2013, Ervin, S.).

Franchisor OLP entered into a franchise agreement with Harders allowing Harders to operate a OLP franchise for five years. After the agreement ended, OLP learned that Harders was operating another outdoor lighting business and that a number of projects Harders had completed while operating as an OLP franchise were displayed on the new business’ website.

OLP sought damages for failure to pay royalties and other fees, misappropriation of good will, and engaging in a civil conspiracy. The complaint also sought injunctive relief for non-compliance with the post-expiration restrictions of the franchise agreement. A trial court prohibited Harders from using, and requiring the return of, certain allegedly proprietary information but denied OLP’s request for a preliminary injunction prohibiting the operation of an outdoor lighting business. On appeal, OLP argued that the trial court erred by failing to enforce the non-competition agreement.

OLP argued that the court should evaluate the trial court’s order under the standard used in cases involving the sale of a business in cases involving post-expiration non-competition agreements contained in a franchise agreement. Non-competition agreements contained in an employment contract are more closely scrutinized than those contained in a contract for the sale of a business. The issues in this case involved a franchisor-franchisee relationship and differed from both the employee-employer and the sale of a business contexts. Thus, elements of the tests utilized in both the employee-employer and the business sale context were relevant in analyzing the likelihood that OLP would prevail in the present litigation.

The court held that the ultimate issue in resolving franchisors-franchisees disputes is the extent to which the non-competition provision contained in the franchise agreement is no more restrictive than is necessary to protect the legitimate interests of the franchisor, with the relevant factors to be considered in the making of this determination to include the reasonableness of the duration of the restriction, the reasonableness of the geographic scope of the restriction, and the extent to which the restriction is otherwise necessary to protect the legitimate interests of the franchisor.

The geographic scope of the restriction in the franchise agreement was unreasonable and unenforceable, according to the court. A geographic restriction is only reasonable to the extent it protects the legitimate interests of the employer in maintaining his customers. The non-competition agreement prohibited Harders from operating an outdoor lighting business in areas in which neither OLP nor its franchisees or affiliates were engaged in similar activities. The restriction was excessively broad given that OLP had no legitimate reason for precluding Harders from competing with franchisees or affiliates of OLP which are not engaged in the outdoor lighting business.

The restriction in the franchise agreement went well beyond the prohibition of activities that would put Harders in competition with OLP, according to the court. OLP argued that the non-competition provision did not preclude Harders from engaging in an overly broad range of activities, and that the trial court erred in using the test used in the employer-employee context rather than the test used in the business sale context. The non-competition agreement prohibited Harders from involvement in any business competing with an outdoor lighting business and any business similar to OPL regardless of the extent to which either type of entity actually competes with OPL. There was no evidence that prohibiting Harders from having any involvement in any business “operating in competition with an outdoor lighting business” or any business “similar” to the one Harders operated as an OLP franchisee was necessary to protect any of OLP’s legitimate business interests.

The case is No. 12-CVS-4430

Attorneys: Michael R. Gray (Gray, Plant, Mooty, Mooty & Bennett, P.A.) for Outdoor Lighting Perspectives Franchising, Inc. Jason B. Buckland (Hagan Davis Mangum Barrett & Langley, PLLC) for Patrick Harders.

Companies: Outdoor Lighting Perspectives Franchising, Inc.

Cases: FranchisingDistribution NorthCarolinaNews