Restrictive Covenants in New York Franchise Agreements: Strategic Use of Restrictive Covenants by Franchisors

New York franchise agreements typically contain restrictive covenants against competition and/or a franchisee non-compete clause. Such provisions are meant to prevent franchisees, whom are granted rights by the franchisor to operate a business modeled on the Franchise Program from engaging in business activities in competition with the franchisor during or following termination of the franchise relationship. Most franchise agreements have a restrictive covenant term with a limited length post termination.

Franchise Strategy

Restrictive covenants in franchise agreements serve a number of purposes, including:

  1.  Protecting the franchisor’s goodwill;
  2.  Protecting the franchisor’s confidential information;
  3.  Ensuring loyalty to the franchise network; and
  4.  Preventing former franchisees from becoming future competition.

Knowledge of local franchise law and jurisprudence is essential in assisting in enforcement of these clauses.

In-term Covenants & Post-term Covenants:

Franchise agreements shall often include two kinds of restrictive covenants: “in-term covenants” and “post-term covenants.” In-term covenants limit what a franchisee can do during the term of the franchise agreement (for example, restricting the franchisee from operating a competing business within a certain geographical vicinity during the term of the agreement), and post-term covenants restrict competition with the franchisor after the franchise relationship has ended (restrictions for a period of time after termination of the agreement).

The Enforceability of Restrictive Covenants in New York

New York courts shall, normally, consider several factors in determining whether or not, or to what extent, NY courts shall enforce a restrictive covenant in a franchise agreement. We shall be discussing these factors in a post to following this post and the post shall be found at: Enforcement of Restrictive Covenants in New York.

Considerations Before Including a Franchise Restrictive Covenant in a Franchise Agreement

Restrictive covenants are crucial for protecting a franchise’s brand reputation, so it is important for franchisors to ensure their restrictive covenants shall survive the scrutiny of New York and other courts. Franchisors should make sure such clauses are carefully drafted so as only to restrict activity as much as is necessary to protect their legitimate business interests, while considering proactive means to assist in guarantying enforcement of these covenants. We recommend retaining a nuanced and experienced New York franchise lawyer to draft your franchise agreements, including restrictive covenants, to protect your business interests in New York.

A follow-up article shall be posted in the next couple of weeks discussing the New York test for enforcing restrictive covenants in franchise agreements. Please check back. If you are interested in a consultation with Sean Hayes, a globally-ranked attorney in franchise, litigation and corporate law – please schedule a call at: Schedule Call.

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