Noncompetition Agreements — Enforceable?

by Jeffrey A. Babener
MLM Legal Attorney
©2011

An interesting issue arises when a franchisor attempts to prohibit franchisees from establishing competing businesses after the franchise agreement is terminated. This issue was recently addressed by a California U.S. District Court in a case entitled Scott v. Snelling. In that case, the parties entered into a franchise agreement for the operation of a temporary personnel service. The agreement included a noncompetition clause prohibiting the franchisees from establishing a competing business in the franchise area for a period of two years after termination of the agreement. The agreement also contained a choice of law provision requiring that the agreement be interpreted under Pennsylvania law. The franchisees subsequently terminated the franchise agreement and established a competing business in the same area.

In a lawsuit filed by the former franchisees, the court was asked to rule on the enforceability of the noncompete provisions. The court held that a California statute prohibiting noncompetition agreements rendered the noncompete provisions unenforceable. In so ruling, the court determined that the California statute reflected a "strong public policy" which took precedence over the choice of law provisions in the franchise agreement. Thus, even where a franchise agreement includes noncompetition and choice of law provisions, these provisions may be rendered unenforceable by state statute. Accordingly, parties to franchise agreements should be aware of the laws of the state in which the franchise is to be established.

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About the Author:

Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad. His firm has focus on startup and emerging MLM companies. He has been adviser to such companies as Avon, Nikken, Discover Toys, NuSkin, Excel, Fuller Brush, Cell Tech, Kaire, Sunrider, Melaleuca, etc. He is editor of the industry resource internet site www.mlmlegal.com.  He is a frequent lecturer and has been interviewed on the industry, and published, in many publications. Babener & Associates, 121 SW Morrison, Suite 1020 Portland, OR 97204, www.mlmlegal.com.

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