4th Circuit Analyzes Franchise Non-Compete Agreement

In an unpublished decision, the U.S. Court of Appeals for the Fourth Circuit determined that restrictive covenants do not necessarily apply to former franchisees who choose not to renew the franchise agreement.

Devin Hamden operated a Total Car Franchising Corporation (“TCF”) franchise from 1996 through 2011.  The franchise agreement set a 15-year term renewable by Hamden prior to the expiration.  The agreement contained non-competition, non-disclosure and non-solicitation provisions stipulating that the restrictive covenants were in operation during the agreement and “for 2 years following termination of [the] Agreement.”  The agreement expired on May 9, 2011, and Hamden elected to continue his business without renewing the franchise agreement.  TCF sued to enforce the restrictive covenants, but the district court determined that the covenants did not bind Hamden.

On appeal, TCF argued that expiration of the agreement was essentially a termination, and therefore the covenants applied.  Applying Virginia law, the Fourth Circuit analyzed the use of the terms “termination” and “expiration” in both the franchise agreement and a separate confidentiality agreement between the parties.  After reviewing the use of the terms in both agreements, the Fourth Circuit determined that the parties had applied different meanings to both terms, and therefore, an expiration of an agreement was not necessarily a termination.  The Court found that the parties’ use of the terms showed that termination required a specific act that ended the agreement, not merely the agreement’s natural conclusion.

With this interpretation, the Court determined that the non-competition, non-solicitation, and some of the non-disclosure provisions in the franchise agreement did not bind Hamden.  However, the Court held that the non-disclosure clause protecting TCF’s trade secrets was enforceable against Hamden.  This clause included language saying that the trade secret non-disclosure clause operated “during the term of the Franchise Agreement and thereafter.”  According to the Court, this language indicated an intent for the restriction to continue beyond the agreement’s natural expiration.

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