United States: Massachusetts’ Highest Court Upholds Post-Term Non-Compete Clauses

Last Updated: October 28 2004
Article by Lee J. Plave

On October 1, 2004, the highest court in Massachusetts, the Supreme Judicial Court, handed down a ruling in an important case for franchisors, Boulanger v. Dunkin’ Donuts Incorporated, 815 N.E. 2d 572 (Mass. 2004).

The case involved a former Dunkin’ Donuts franchisee who had entered into three franchise agreements for the operation of Dunkin’ Donuts franchises in upstate New York. Among other things, each of these agreements gave the franchisee access to, and the right to use, the Dunkin’ Donuts operating system, trade secrets, and business methods. As part of the consideration for these rights, the franchisee agreed to a post-term non-compete clause, under which he agreed that for two years after the termination of his franchise agreements he would not work for a business selling substantially similar products within five miles of any Dunkin’ Donuts location.

Despite the terms of the franchise agreement, the franchisee sought a declaratory judgment affirming that he was not bound by a post-termination non-competition clause. The franchisee, who had sold his franchise for a profit, wished to buy a franchise from one of Dunkin’ Donuts’ competitors.

By arguing that the non-compete clause was unenforceable, the franchisee challenged a fundamental tenet underpinning franchise systems. Among other arguments, the franchisee contended that the post-term non-compete clause deprived him of the right to earn a living, that it was unreasonable to enforce the clause at "remote locations" (that is, sites other than the location at which the franchisee’s former franchised location was operated), and that the clause sought to protect information that was not actually confidential. On this last point, the franchisee contended that the system information was not a protectable interest because some of that information was conveyed to franchisees at meetings also attended by the franchisor’s employees, who were not subject to a confidentiality agreement.

At trial, the Superior Court rejected the franchisee’s arguments. Boulanger v. Dunkin’ Donuts Incorporated, 2003 Mass. Super. LEXIS 248 (Mass. Super. Ct. 2003). The franchisee appealed and the Supreme Judicial Court took the case under a direct appeal. The case was argued before the court on May 4, 2004. At the Supreme Judicial Court’s invitation, and on behalf of the International Franchise Association, we submitted an amicus curiae brief advising the court that post-termination non-competition clauses should be enforced for the benefit of the franchisor and the franchisees in a franchise system. The court’s ruling agreed with that position.

Standard to Apply to Non-Compete Clauses in Franchise Cases

The Boulanger decision concluded that a non-compete clause, considered in the context of a franchised business, should be evaluated under the same standard courts would apply to a non-compete clause in the context of the sale of a business. This standard – adopted by most states reviewing franchise non-compete clauses – is different and less restrictive than the standard applied to evaluating non-compete clauses in the context of employment agreements. Courts applying the "sale-of-business standard" typically permit greater flexibility to parties and enforce a non-compete clause especially where it was bargained for and where the party that is bound receives a benefit from the decision to include the clause in the parties’ contract.

Reasonableness of the Restrictions

Once it applied the sale-of-business standard, the court struck down the franchisee’s challenge to the reasonableness of the non-compete clause. Even though the franchisee did not challenge the time limit of the clause, the court in dictum noted that the two-year limitation was reasonable. As to the geographic scope – five miles from the original franchised location and five miles from any other franchisee’s location – the court agreed that the scope of the clause was reasonable and intended to protect the franchise system:

"The issue is whether confidential information could be used by the plaintiff to harm other franchisees in other locations. The system is reasonable because it binds all other franchisees and is part of what the [franchisor] sells. The system is part of what the plaintiff, as a franchisee, purchased and what protected him while he was a franchise owner. This conclusion is consonant with the principle that ‘a seller of a business interest may not derogate from the value of the business as sold by competing with it … [because ] the buyer is entitled to the full value of the ‘benefit and advantages’ of his purchase.’"

No Legitimate Business Interest?

The franchisee’s argument on this point suggested that there was no legitimate business interest that could be protected by a non-compete clause because some of the confidential information was passed along in the presence of employees not subject to a confidentiality agreement or a non-compete agreement. The court rejected this argument. In particular, the court wrote that:

All employees were bound by [the franchisor’s corporate] code. Moreover, the fact that the [franchisor] does not require all employees to sign a covenant not to compete is not relevant, because the [franchisor] may reasonably decide which persons pose the greatest risk of using its confidential information competitively, and can reasonably concludethat all franchisees pose such a risk.

The franchisor’s concern was hardly abstract: Seeking to buy a competitive franchise, the franchisee had already contacted another franchisor shortly after selling his franchise. This important point did not go unnoticed by the court. Additionally, the court observed that "[a]lthough the [franchisor] may not have done all it possibly could have to guard the secrecy of the information, the information was nevertheless confidential."

Depriving the Franchisee of the Right to Make a Living

Finally, the court disagreed with the argument that the effect of the non-compete clause was to deprive the plaintiff of the right to earn a living. The ruling observed that the franchisee was not prevented from working at another Dunkin’ Donuts’ location, although in a different capacity than when he was a franchisee, for the duration of the non-compete period.

Massachusetts Courts Will Regard Non-Competes Pragmatically

The Boulanger decision affirms that Massachusetts courts will consider non-competition clauses in the same commercially pragmatic manner as do the majority of other states. The development is beneficial to franchisors and the franchisees who comprise the system and who are all the beneficiaries of these restrictions when reasonably applied.

This article is intended to provide information on recent legal developments. It should not be construed as legal advice or legal opinion on specific facts. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.