Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Neb. Sup. Ct.: Nebraska’s stance against severability of unenforceable covenants not to compete reaffirmed, (Apr 13, 2015)

By Jody Coultas, J.D.

A district court did not err in finding that professional cleaning and maintenance services franchisor Unlimited Opportunity, Inc. could not enforce a provision in its franchise agreement, restricting a former franchisee from competing anywhere a franchise operated, according to the Nebraska Supreme Court. The court reaffirmed its position against severability of noncompete clauses (Unlimited Opportunity, Inc. v. Waadah, April 10, 2015, Heavican, M.).

Unlimited Opportunity, d/b/a Jani-King of Omaha, filed suit against the former franchisee for breach of the noncompete clause in the franchise agreement after the former franchisee diverted Jani-King customers to his new janitorial business.

A state district court found that a one-year provision restricting competition anywhere a Jani-King franchise operates was unenforceable and did not further consider Jani-King’s claim with respect to a two-year covenant. Because the court found the covenant not to compete legally unenforceable, the former franchisee was a competitor of Jani-King and thus immune from a claim of tortious interference. Jani-King asked the court to reconsider the law against severability.

The district court did not err in considering the one- and two-year covenants together, according to the court. Nebraska courts have held that severability of noncompete covenants is against public policy because it creates uncertainty in employees’ contractual relationships with franchisors, increases the potential for confusion by parties to a contract, and encourages litigation of noncompete clauses in contracts. Contrary to Jani-King’s argument, the Nebraska Franchise Practices Act did not dictate public policy for the severability of franchise agreements. The Act does not mention noncompete covenants in a franchise agreement. Therefore, the refusal to sever the two clauses at issue was proper.

Because the noncompete covenant was unenforceable, the court refused to overturn the district court’s ruling. A covenant not to compete must not injure the public, must be tailored to reasonably protect the employer in some legitimate business interest, and must not be unduly harsh or oppressive on the party against whom it is asserted. Because the covenant in this case was categorized as the sale of goodwill of a business, it could not be any greater than necessary to achieve its legitimate purpose. The one-year restraint prohibited the franchisee from operating a competing business anywhere in which a Jani-King franchise operated. Jani-King operates on a multi-state and international basis. Therefore, the clause was similar to having no territorial restriction at all and was unreasonable in geographic scope.

The case is No. S-14-012.

Attorneys: Edward F. Pohren (Smith, Gardner, Slusky, Lazer, Pohren & Rogers, L.L.P.) for Unlimited Opportunity, Inc. Philip J. Kosloske and Ryan M. Hoffman (Anderson, Bressman & Hoffman, P.C., L.L.O.) for Anthony Waadah.

Companies: Unlimited Opportunity, Inc.

Cases: FranchisingDistribution NebraskaNews