Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—TexCtApp: Franchisor Enforcing Noncompete Agreement Against Former Franchisees Not Entitled to Attorney Fees, (Apr 26, 2013)

By John W. Arden, J.D., LL.M.

A temporary staffing service franchisor that obtained permanent injunctive relief—enforcing a post-term noncompetition agreement with franchisees—was not entitled to receive attorney fees from the franchisees, according to the Texas Court of Appeals (Franlink, Inc. v. GJMS Unlimited, Inc., April 25, 2013, Brown, J.).

The trial court’s denial of attorney fees was upheld because the Texas statute governing covenants not to compete provides attorney fees only for the defense of enforcement of unreasonable covenants, not for the enforcement of an unreasonable covenant that must be judicially reformed, as this one was.

Background. In 1996, Franlink entered a franchise agreement with Gloria and Jaime Salazar, who remained franchisees until their last franchise agreement expired on January 9, 2011. The franchise agreement contained a noncompete provision, prohibiting the Salazars from owning or operating a competing business within a designated market area or soliciting Franlink’s clients for two years after its expiration.

The Salazars informed Franlink that they intended to open their own staffing business through their company, GJMS Unlimited. To prevent GJMS Unlimited from competing directly against it, Franlink preemptively filed suit against GJMS Unlimited and the Salazars, seeking injunctive relief enforcing the noncompetition provision and seeking attorney fees under Chapter 38 of the Texas Civil Practice and Remedies Code. The Salazars answered and counterclaimed, alleging that the noncompetition provision was overly broad and unreasonable in its time, geographical area, and scope of activity.

After an evidentiary hearing on Franlink’s request for temporary injunctive relief, the trial court signed an agreed order enjoining GJMS and the Salazars from directly competing with Franlink pending trial on the merits of the action. In doing so, the court modified the noncompetition provision to narrow its geographic area and scope. At trial of the request for a permanent injunction, Franlink sought to expand the limitation of the noncompetition provision and presented one of its attorneys to provide expert testimony on its request for fees.

After a bench trial, the court granted a permanent injunction substantially similar to the previously issued temporary injunction and denied the request for attorney fees.

Award of attorney fees. The appeal concerned a single issue—whether the trial court erred in denying Franlink’s request for attorney fees. The franchisor contended that it was entitled to such fees as a prevailing party under Section 38.001(8) of the Texas Civil Practice and Remedies Code and that the trial court abused its discretion in denying attorney fees.

Section 38.001(8) states that a prevailing party may recover reasonable attorney fees from an individual or corporation if the claim is for an oral or written contract. The Salazars claimed that (1) Franlink was not a prevailing party because it was granted an injunction only after the trial court narrowed the noncompetition agreement and (2) the attorney fee statute was preempted by Texas Business & Commerce Code §15.52, which governs the enforcement of covenants not to compete.

Franlink, on the other hand, argued that (1) the statute governing covenants not to compete does not bar an award of attorney fees under the Civil Practice and Remedies Code and (2) barring attorney fees for a prevailing party under section 38.001 is contrary to the legislative purpose of "relaxing the requirements for enforceability of covenants not to compete and removing barriers to their enforcement."

The appellate court disagreed with Franlink, concluding that its interpretation was contrary to the scheme of the attorney fees statute and the plain meaning of section 15.51(c) of the covenant not to compete statute. Section 15.50 provides that a covenant not to compete is enforceable "if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made" and "contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee."

Section 15.51 reflects that the legislature expressly intended to permit an award of attorney fees in certain circumstances, but not in others.

"Viewed in its entirety, subsection (c) provides for an award of attorney’s fees in a single circumstance: In the context of a personal-services agreement, attorney’s fees may be awarded to a promisor who satisfies certain evidentiary requirements in defending against enforcement of an unreasonable covenant," the court held. Franlink did not contend that the circumstance applied in this case.

"Notably, the legislature did not similarly provide for an award of attorney’s fees to a promisee who seeks to enforce an unreasonable covenant not to compete that must be reformed, as this one was," the court noted. The legislature expressly limited the relief available in this circumstance to injunctive relief.

The case is No. 12-12-00290-CV.

Attorneys: Dennis M. Sanchez (Sanchez Whittington Zabarte & Wood LLC) for GJMS Unlimited, Inc., Gloria Salazar, and Jaime Lee Salazar. Ileana M. Blanco (DLA Piper LLP) for Franlink, Inc.

Companies: Franlink, Inc.; GJMS Unlimited, Inc.

Cases: FranchisingDistribution TexasNews