Download Non-Compete Case in the US Court of Appeals

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Non-Compete Case in the US
Court of Appeals
By Richard Bayer
Mar 27, 2012
Michael Einbinder of this firm recently argued an appeal in the United States
Court of Appeals for the Second Circuit for a matter involving the enforcement
of a non-competition covenant by our clients, Singas Famous Pizza Brand Corp.
and Singas Famous Pizza & Restaurant Corp., which operate or franchise Singas
Famous Pizza restaurants. The United States District Court for the Southern
District of New York originally held that the defendants, a former franchisee
and its principals, were enjoined from operating similar pizza restaurants from
the location of the franchised business and from a Queens location that was
located within ten miles of the franchised business. The defendants appealed the
District Court’s decision as to the Queens location only, arguing that the tenmile geographic scope of the non-competition covenant was unreasonably broad.
The United States Court of Appeals for the Second Circuit affirmed the decision.
The holding of this case is of interest to the franchise community. The Court of
Appeals found that defendants expressly agreed in the Franchise Agreement that
the ten-mile geographic restriction was fair, reasonable and necessary for the
protection of the franchisor’s proprietary interest and that a breach of the
non-competition covenant would cause substantial and irreparable harm to the
franchisor. The Court of Appeals noted that the defendants’ agreement to such
contractual provisions could be viewed as an admission.
The Court of Appeals referred to the legitimate interest of the franchisor in
preventing a former franchisee from using knowledge that it gained from the
franchisor to serve former customers and in preventing customer confusion and
damage to the franchisor’s goodwill. The Court of Appeals found that defendants’
operation of a pizza restaurant in the Queens location posed a danger to Singas
Famous Pizza’s institutional know-how, reputation and goodwill, especially
because the defendants used a virtually identical menu, adopted certain
practices distinctive to the Singas Famous Pizza system, employed personnel from
its former Singas Famous Pizza franchised restaurant and used custom made
equipment from that former franchised restaurant.
As a practice advisory, this decision serves as a lesson to draftsmen to make
sure that their franchise agreements and non-competition agreements contain
express statements and admissions that establish the fairness and reasonableness
of the restrictive covenants.