California NonCompete Franchise Issues

Quick Summary

There is no exception in California law for non-compete restrictions in a franchise contract.

This is a complex issue I repeatedly see. HOWEVER, do not quickly assume this means any noncompete is illegal.

Other contract terms in a franchise agreement may create a business sale situation where noncompete restrictions are allowed in California.

Law Review

The starting point is restraints on trade, including post-contract noncompete terms, are not enforceable in California.

However, there is a statutory exception where if someone sells the ownership interest in a business, or if they sell substantiall all the business assets and goodwill, that a noncompete can be enforced to protect the buyer of the business interests / assets.

When it comes to franchise agreements how termination of the franchise is dealt with varies from franchise to franchise.

Although these contracts can sometimes run hundreds of pages in mind-numbing legalese, the terms need to be dissected and understood so you know your rights.

Example: Assume you have a franchise and elect not to renew. What happens to your inventory, assets, name, phone number, website url, customer list, lease, and on and on? This is often dealt with at length in the franchise agreement.

If the agreement provide you sell everything to the franchisor, or the franchisor has a first option right to buy you out, you may be in a situation where the business is being sold and a noncompete can be enforceable.

Or maybe these types of terms are only implicated if you breach the franchise contract and terminate early.

Or maybe there is only an option for a partial purchase and this would not give rise to being a business purchase which may trigger an enforceable noncompete.

So much depends on the language in the contract it is impossible to predict in an article like this whether a franchise non-compete is enforceable or not.

You will need to have the entire contract reviewed to evaluate potential strategies and what may occur depending on what courses of action are taken.

If you or your franchise attorney need assistance with noncompete issues, contact Mr. Kindsvater right away:

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