Georgia Covenants Not to Compete Between Franchisors and Franchisees
As is customary of the industry, franchisors typically require franchisees to enter into agreements containing non-competition provisions. In Georgia, these provisions can be extremely difficult to enforce, and both parties are best advised to seek counsel.
Gandolfo’s Deli Boys, LLC v. Holman is a recent case which illustrates Georgia’s strict analysis of non-competition provisions and its attitude towards choice of law provisions. In the case, Gandolfo’s was a restaurant franchisor marketing hot and cold deli sandwiches and related food and beverage products. The franchisor and its Duluth, Georgia franchisee entered into an agreement containing a noncompetition covenant prohibiting the franchisee from operating a “competitive business” at its site, within 10 miles of its site, and within 10 miles of any of Gandolfo’s restaurants. The covenant was to be governed by Utah law despite the franchisee’s location in Duluth.
The court found the non-competition covenant at issue was unenforceable under Georgia law; therefore applying the “choice of law provision” selecting Utah law would contravene Georgia public policy.
Under Georgia law, franchise agreements are analogous to employment contracts, and covenants not to compete receive strict security and are not blue-penciled (i.e., the court will not “blue pencil” the provision by striking overly broad provisions of the covenant and upholding the remainder). A non-competition covenant entered into in connection with a franchise or employment contract is enforceable only where it is strictly limited in time and territorial effect and is otherwise reasonable considering the business interest of the employer sought to be protected and the effect on the franchisee.
Applying the above standards to the case, the court found the non-competition covenant at issue unenforceable for the following reasons: (1) The covenant prohibited the former franchisee from employment in a competing business “in any capacity”, including owner, officer, employee, or otherwise; (2) The covenant’s definition of competitive business unreasonably restricted the franchisee from opening a broad array of restaurants, including those that do not target the same customers or compete with Gandolfo’s; (3) The territorial restriction prohibiting the franchisee from operating within 10 miles of any other Gandolfo’s restaurant was not strictly limited because it was capable of expanding and changing and could not be determined until the contract terminated; and (4) The territorial restriction prevented the franchisees not only from doing business in areas in which it had actually done business, but also in areas where only Gandolfo’s and its other franchisees conduct business.
As demonstrated by the above case, non-competition covenants between franchisors and franchisees must be drafted very precisely to withstand a court’s scrutiny in Georgia. Both parties are advised to retain legal counsel to tailor the language for their specific circumstances.
If you would like more information on the application of non-compete covenants, please call or email Hoffman & Associates today.
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