United States: A Tale Of Two Non-Competes: Why Drafting Matters

Last Updated: December 17 2015
Article by Alexander S. Radus

In a recent blog, we cautioned readers that an overprotective non-compete can result in no protection at all. In that case, Unlimited Opportunity, Inc. v. Waadah, a franchisor could not enforce a non-compete clause despite its franchisee's clear violation. 861 N.W.2d 437 (Neb. 2015).

A recent case, JH Inc. v. Cline, paints a rosier picture for franchisors. No. 14-6931 (D.N.J. Oct. 29, 2015). Here too, the allegations stated a blatant violation of a non-compete. But while Waadah was a drafting cautionary tale, Cline shows why certain provisions should be on the drafting checklist. In this blog, we'll explain how certain franchise agreement provisions paved the way for a preliminary injunction prohibiting a former franchisee from competing.

Jackson Hewitt, Inc. ("JH") is a tax preparation business franchisor. David Cline was a JH franchisee, operating four locations in California and Arizona. Their franchise agreements contained a non-compete and post-termination obligations:

  • Non-Compete

    • Duration: 2 years after termination
    • Scope: Within the territory (defined by zip code) + 10 miles outside the territory.
  • Post-Termination Obligations

    • Pay all amounts owed to JH;
    • Return all trade secret, confidential and proprietary materials to JH;
    • Delete all confidential and client materials; and
    • Transfer telephone numbers to JH.

The franchise agreements also required Cline to acknowledge that the unauthorized use or disclosure of trade secrets, confidential and proprietary information would cause "irreparable injury" to JH.

JH terminated Cline's franchise for failure to fulfill his financial obligations. JH alleged that Cline continued to operate tax return preparation businesses in the same locations and with the same telephone numbers and employees as when he was a JH franchisee. Importantly, JH also alleged that Cline was using its client files. JH claimed that Cline even posted fliers advertising his new tax preparation business that were directly targeted at JH's customers in its Walmart location:

"ATTENTION WAL-MART CLIENTS the Jackson Hewitt Tax Service in the Walmart is NOT the same Jackson Hewitt that did your taxes last year."

JH filed suit seeking a preliminary injunction compelling Cline to observe his obligations under the franchise agreement. To succeed JH had to establish:

  1. That JH was likely to eventually succeed on the merits if the case went to trial;
  2. That JH would suffer "irreparable harm" if the court did not grant the injunction;
  3. That the harm to Cline with the injunction would not exceed the harm to JH without the injunction; and
  4. That the public interest favors granting the injunction.

Prong 1 was easily established: JH alleged a blatant breach of the non-compete and Cline offered no evidence in his defense. Prong 4 was also easily satisfied.

With respect to prong 2, the court stated there is a likelihood of irreparable harm when one party possess another party's confidential information and is "poised to use or disclose" such information. Cline's failure to return client files and his potential use or inevitable disclosure of the information in the client files established irreparable harm. The court also noted that Cline had acknowledged as much in the franchise agreement.

With respect to prong 3, the court found that the 2-year/10 mile non-compete was reasonable. It did not restrict Cline from engaging in his livelihood outside the restricted area. By comparison, the hardship JH faced would be significant if the court permitted Cline to retain and potentially use JH's client information.

Notably, the court's analysis did not turn solely on the non-compete. Instead, the court was most interested in Cline's possession and potential use of JH's client information. Had JH relied only Cline's competition, it may not have so easily established "irreparable harm."

Drafting Takeaway 1: Cline's post-termination obligations under the franchise agreement specifically included returning all trade secret, confidential and proprietary materials. This provision protected JH's IP by paving the way for a breach of contract claim. But more importantly for injunction purposes, it helped establish "irreparable harm" and tipped the balance of hardships in favor of JH – perhaps more than if JH simply alleged a violation of the non-compete. Franchise agreements should have robust post-termination obligations, especially regarding the return and/or destruction of confidential information. They not only protect a franchisor's IP, but may help enforce non-competes.

Drafting Takeaway 2: JH's franchise agreement specifically required Cline to acknowledge that unauthorized use and disclosure of trade secrets would cause "irreparable injury" to JH. Under another set of facts, this provision alone may not mean much. But here the court specifically noted it. Including an "irreparable injury" acknowledgment in a franchise agreement may help eventually establish a successful preliminary injunction.

Waadah and Cline represent two sides of the non-compete coin. Although their facts both involve egregious violations of non-compete clauses, the results were very different. The devil is in the drafting. Waadah demonstrates the importance of understanding how state law will interact with contract provisions, especially non-competes. Cline shows that attention to other provisions in a franchise agreement can strengthen a claim to enforce a non-compete. The bottom line, of course, is the bottom line: An upfront investment in attentive drafting can save a lot of hard earned franchise fees and royalties in the long run.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

Alexander S. Radus
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions