Blawg

Under numerous state laws, franchisees are entitled to notice prior to termination.  The amount of the time varies by states.  It could be 30, 60, or even 180 days.
Who owns the franchise business between when the franchisee is given notice, and the franchise business is terminated.  That question was posed in the case of Charter Practices Int’l, LLC, and Med. Mgmt. Int’l, Inc. [Banfield] v. John M. Robb [Franchisee].
Banfield gave Franchisee notice of termination.  Pursuant to Connecticut law, a 60-day notice was required and given.  The Termination Notice stated that Banfield would assume the daily operations of the franchise business until the termination date.  When questioned by the press, Banfield instructed personnel to state:

Dr. Robb no longer owns a Banfield hospital.

But, is that true?  Who owns the franchise business post a notice of the termination, but prior to termination.  The court’s decision turned on the expressed language in the franchise agreement.
The franchise agreement gave Banfield the right to step in and operate the franchise business in the event of default.  However, this provision deemed that the franchise business would still be owned by the franchisee and the revenues derived from the franchise business during the franchisor’s operation accrued to the franchisee.
This deem of ownership is important.  Franchisee, citing Connecticut’s Law requiring a 60-day notice of franchise termination, argued that Banfield’s takeover of the operation of the franchise business violated the Connecticut Law.  Franchisee’s argument was rejected.  Banfield gave Franchisee a 60-day notice of termination and Banfield’s exercising of step-in rights did not violate the Connecticut Law because the Franchisee still owned the franchise business during the step-in period.  Banfield’s personnel press response was a misstatement and inaccurate.

Yes.  It is back.  The Small Business Administration franchise registry is back.  Franchisors must be on it in order for your prospective franchisee to get funding.  Wait, I miss spoke.  It is an SBA franchise directory, not the registry, the Directory.
The Directory is not optional.  Unlike in the past, where franchises could be approved as part of the franchisee loan process, franchises must be pre-registered.

Under these changes, Lenders and CDCs will no longer have to review franchise or other brand documentation for affiliation or eligibility.

The criteria for being in the Directory is very straightforward. To be in the Directory, Franchises must meet the FTC definition of a franchise. The Directory does not replace the need for the standard of SBA Addendum.  Franchisors will still be asked to the sign the Standard SBA Addendum.
The Directory will contain the following information:

• Whether the brand meets the FTC definition of a franchise;
• An SBA Franchise Identifier Code, if applicable;
• Whether an addendum to the franchise agreement is needed; and
• Whether there are additional issues the SBA Lender must consider with respect to the brand.

The Directory will be administered by FRANdata and found on the SBA website at www.sba.gov/for-lenders.  Franchisors will be required to register on the Directory annually.  The Directory requirement won’t go into effect until January 1, 2018, but franchisors can register now.
SBA notice regarding the directory can be found at http://www.frandata.com/wp-content/uploads/2017/10/5000-17009.pdf.

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