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.

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