The signing of non-competes in the world of business is almost standard protocol. Employers ask employees to sign non-competes. In the sale of businesses, buyers ask sellers to sign non-competes. And, Franchising is no exception. Almost universally, Franchisors require Franchisees to sign a non-compete when acquiring a franchise.
But, how far will courts go to enforce non-competes? The general rule is that enforcement of non-competes only extends to persons who sign the non-competes. Under that premise, franchisors may require all officers, directors, and owners to sign a separate non-compete.
However, as the saying goes, with every rule there is an exception. An exception can be found in the case of Jackson Hewitt, Inc. v. H.E.A.T. Enterprises, LLC. Jackson Hewitt is in the business of tax preparation. H.E.A.T. Enterprises, LLC is a former Jackson Hewitt franchisee. As part of the Jackson Hewitt franchise agreement, H.E.A.T. Enterprises, LLC signed a non-compete. H.E.A.T. Enterprises committed not to compete with Jackson Hewitt during the term of the franchise agreement and the restricted period after franchise agreement terminated. Jackson Hewitt secured an injunction against H.E.A.T. Enterprises, LLC to enforce the non-compete.
Arguing that they were not bound under the non-compete, the owners/operators of H.E.A.T. Enterprises continued preparing taxes in competition with Jackson Hewitt through other companies, which they owned and controlled. Jackson Hewitt successfully cried foul. The court extended the non-compete to the owners of H.E.A.T. Enterprises even though the owners/operators did not sign the non-compete.
The court found resoundingly “yes” (in the words of the court), the owners of the franchise can be bound under the non-compete, because the owners are “successors in interest” and there was a “substantial continuity of identity” between the franchisee and the owners’ other companies. Since the owners/operators were active in the franchise business, received revenues from the franchise business, and were the franchisee designated managers for H.E.A.T. Enterprises, the court determined that the owners/operators were essentially H.E.A.T. Enterprises and bound under the non-compete.
Lesson from the court: You cannot do indirectly what you cannot do directly and once in awhile, sometimes, maybe you will be personally bound by the actions of a company you own, perhaps in the case of a non-compete.