When is a Franchise Non-competition Reasonable?

Just because there are words in a franchise agreement signed by a franchisor and franchisee, does not make the words enforceable.  In the case of non-competes, it is a matter of the Rule of Reason.

As stated by a Michigan court in the case of LITTLE CAESAR ENTERPRISES, INC. et al.  v. CREATIVE RESTAURANT, INC., et al., [Case No. 2:16-cv-14263] whether a noncompetition [the franchisee’s promises not to operate a like business post-termination, nonrenewal, transfer, or expiration of the franchise agreement] depend on if the noncompete clause is reasonable under the Rule of Reason.

Generally, federal courts assess commercial noncompete agreements under the rule of reason[i].  A contract clause "violates the rule of reason if it `may suppress or even destroy competition,' rather than promote competition[ii].  

The key concern is possible suppression or destroying of competition.  No actual suppression or destruction is required.  The Rule of Reason uses the word ‘may.’  There is also a special focus on the geographic area were non-compete sought to be enforced and the market for the product or service of the competing business.

To survive under the rule of reason, a party challenging a contract must allege that the contract ‘produced adverse anticompetitive effects within relevant product and geographic markets.’[iii]

For a non-compete  to be found unreasonable and therefore unenforceable, a franchisee must show that the non-competition covenant ‘produces[d] adverse anticompetitive effects within relevant product and geographic markets[iii].


[i]  LITTLE CAESAR ENTERPRISES, INC. et al.  v. CREATIVE RESTAURANT, INC., et al., [Case No. 2:16-cv-14263] citing Innovation Ventures, 499 Mich. at 514 (compiling cases).

[ii] Id quoting United States v. Blue Cross Blue Shield of Mich., 809 F. Supp. 2d 665, 671 (E.D. Mich. 2011) (quoting American Needle, Inc v. National Football League, 560 U.S. 183, 203 n.10 (2010)); see also Perceptron, Inc. v. Sensor Adaptive Machs., Inc., 221 F.3d 913, 919 (6th Cir. 2000)

[iii] Id

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