Another Lesson To Resist Overreaching When It Comes To Non-Competition Agreementsby Joshua Hiller on 05/17/12
This week, the North Carolina Business Court provided yet another object lesson for companies seeking to protect their interests through non-competition agreements. In Outdoor Lighting Perspectives Franchising, Inc. v. Harders (2012 NCBC 26), the Business Court denied the Plaintiff’s motion for a preliminary injunction, and in doing so, invalidated the Plaintiff’s covenant not to compete on grounds that it was overbroad. This decision provides another example to businesses and their counsel to draft restrictive covenants with careful attention to their scope and reach, whether in the employment context, the sale of a business, or in this case, in connection with a franchise.
In Outdoor Lighting Perspectives, the Plaintiff Franchisor sought to enforce the following restrictive covenant in its franchise agreement with the Defendant Franchisee:
Upon termination or expiration . . . transfer, sale or assignment of this Agreement by the Franchisee, neither the Franchisee, the operating manager or the Franchisee’s owners will have any direct or indirect interest (i.e. through a relative) as a disclosed or beneficial owner, investor, partner, director, officer, employee, consultant, representative or agent, for two (2) years, in any Competitive Business within 100 miles of the Territory or any other franchisee’s Franchisor’s or Affiliates territory. (Op. at ¶ 5.) (emphasis added)
Key to the Business Court’s decision was the definition of “Competitive Business,” which the Business Court held was overbroad in relation to the activities that the Defendant Franchisee actually performed under the agreement. Although the agreement contained a “Definitions” section, the term “Competitive Business” was not defined there. “Competitive Business” is described elsewhere in the agreement as any activity “to be used or employed in any business operating in competition with an outdoor lighting business or any business similar to the Business. . .” As defined in the agreement’s “Definitions” section, at least when the term is capitalized, “Business” “means the business operations conducted or to be conducted by the Franchisee consisting of outdoor lighting design and automated lighting control equipment and installation services, using the Franchisor’s System and in association therewith the Marks.”
According to Judge Gale, had the plaintiff simply limited the scope of “Competitive Business” to capitalized “Business,” the Business Court indicated that it would have upheld the provision. (Op. at ¶¶ 35-37.) Judge Gale reasoned that the definition of “Business” with a capital “B” was narrowly tailored to the plaintiff’s actual business. However, what sealed the Plaintiff’s fate was its inclusion of “business” small “b” in the restriction it sought to enforce. Judge Gale determined that the provision as drafted “further restricts Defendants from any outdoor lighting business and any business which competes with a business “similar to” the Franchisee’s business. This expansive language extends well beyond activities that Defendants performed pursuant to the Agreement.” (Op. at ¶ 35.) (emphasis added)
Apart from extending beyond the Defendants’ activities, Judge Gale concluded that the restriction “likewise extends beyond the business [the Plaintiff] itself conducts. The language thus extends beyond [Plaintiff's] legitimate business interests." (Op. at ¶35.) Judge Gale thus held that the term "Competitive Business" was overly broad and “reached beyond the outer limits of North Carolina court decisions upholding restrictive covenants" and it therefore fell "within those cases which prohibit unreasonable restrictions on competition." (Op. at ¶6.)
The lesson here is to be very careful with the scope of any non-competition agreement. If a company or franchisor attempts to restrain competition beyond its business or the actual activates or services it performs, the risk is very great that such a provision could be struck down if later challenged. As the Plaintiff in Outdoor Lighting Perspectives learned, the difference between winning and losing can sometimes come down to a decision on a decision between capital and lower-case letters.