Covenants Not To Compete

The Romanos operated their Aamco franchise for 21 years before transferring their franchise in Hollywood, FL, to a different franchisee. Upon transfer, Romano signed a termination agreement that released the franchisor and preserved rights in favor of Aamco to enforce the post-term noncompete provision in the franchise agreement. The noncompete provision provided a two-year covenant within a radius of 10 miles of the Aamco former center, or “any other AAMCO center.”

The Romanos moved from to Stuart, FL, after selling their center. Five months later, they opened a nonfranchised Treasure Coast Transmissions. Treasure Coast is more than 90 miles away from their former Hollywood location and is not visible from the highway. The Treasure Coast location is only 1.9 miles from another Aamco franchisee, also in Stuart. The Stuart franchisee claims he was impacted by Treasure Coast, but it is unclear by how much. The Romanos testified they did not know the covenant as written would be violated by moving to Stuart and opening Treasure Coast. Upon learning of the impact to the other Stuart franchisee, Aamco sent a cease and desist letter and then when the Romanos did not comply, filed suit against the Romanos.

The parties to the franchise agreement chose Pennsylvania law to apply. Pennsylvania law will enforce a covenant not to compete in the franchise context where the restrictions are reasonably necessary for protection of the franchisor and the restrictions are reasonably limited in duration and geographic extent.

The Ruling

The district court concluded the covenant was reasonably necessary to protect the franchisor's legitimate business interests. Those interests would include trade secrets, confidential information, good will, and unique and ordinary skills, as well as not allowing usurpation of profits from the franchisee's specialized training and skills. Covenants based on the desire to eliminate or stifle competition will not be enforced. The district court recognized that a franchisor also has a legitimate and protectable business interest in the “franchise itself,” that is, the licensing, training, customer, market, product development and benefits provided by the franchisor.

The district court, having concluded that Aamco had a legitimate business reason to enforce the covenant, then dealt with the reasonableness of the restrictions. Pennsylvania law will enforce a covenant where the restrictions are reasonably necessary for the protection of the franchisor without imposing undue hardship on the franchisee and the restrictions are reasonably limited as to duration of time and geographic extent. Where the restrictions are broader than necessary, Pennsylvania courts will grant enforcement limited to those restrictions reasonably necessary for the protection of the franchisor. The court considered this a “holistic inquiry. … It requires balancing the employer's need to protect its investment and disclosures against the [franchisee's] need to earn a living in his chosen field and public interest, and then determining whether the covenant comes reasonably close to that balance.” The Romanos, who were -representing themselves, had the burden of showing unreasonableness.

The court concluded that the 10-mile radius from any Aamco franchise anywhere is unduly burdensome to the Romanos given their honesty ' and is overly broad. The Romanos argued that when they signed their termination agreement, they were reminded only that they had a restrictive covenant and not the terms of the covenant. They claimed they did not intentionally violate the covenant and were limited by their financial situation to locate in Florida. They did not take their customers with them and Treasure Coast did not compete with their former location in Hollywood. By time of trial, the Romanos had operated Treasure Coast for two years and had significant investment in the location.

The court also concluded that the noncompete provision is overly broad because it was not narrowly tailored to protect Aamco's interest in the franchise itself. Aamco argued that this competition would undermine the investment of Aamco in training its franchisees, but the Romanos demonstrated their knowledge of transmissions predated the training by Aamco. The court was careful to limit the holdings to this case, which it distinguished from rouge franchisees who break away to steal customers and system confidential information.

The court then held that the covenant should be modified, or blue-penciled, to narrow the restrictions to prevent competition within 10 miles of their former location in Broward County for a period of two years. As a result, the Romanos' Treasure Coast business was outside the restrictions and did not violate the covenant.

Conclusion

The court appears to have heavily weighted the Romanos' efforts to avoid trademark infringement and efforts not to market based on their former relationship with Aamco. The court did not discuss use of any confidential training information that may have been imparted during the franchise relationship, which could have been a useful argument. At bottom, the court found the Romanos acted honestly in establishing their new business, did not try to trade on their former relationship with Aamco, and found little or no tangible harm to Aamco.

Craig R. Tractenberg is a partner on the franchise team at Nixon Peabody and an adjunct professor of franchise law at Temple University's Beasley School of Law.