Is the covenant not to compete in the Alloy franchise agreement, which extends beyond termination, always enforceable under California law?

According to Alloy's 2025 Franchise Disclosure Document, the enforceability of the non-compete covenant that extends beyond the termination of the franchise agreement is not guaranteed under California law. Specifically, Item 17 of the California addendum to the Franchise Disclosure Document states that such provisions "may not be enforceable under California law." This means that if a franchisee were to challenge the non-compete clause in court, a California court might rule that it is not enforceable.

This has significant implications for prospective Alloy franchisees in California. While the franchise agreement includes a non-compete clause, its actual legal force is uncertain. Alloy imposes a non-compete covenant for a period of two years after the expiration or termination of the agreement, or after the expiration of any Interim Period, regardless of the cause of termination, or within two years of the sale of the Facility or any interest in you. This covenant restricts the franchisee from owning, managing, operating, maintaining, engaging in, consulting with, or having any interest in a Competing Business at the premises of the former Facility, within 15 miles of the Facility, or within 15 miles of any other business or facility using the ALLOY System, whether franchised or owned by Alloy or its affiliates.

For a potential franchisee, this means that while Alloy intends to restrict competition, California law may not fully support this restriction. A franchisee who exits the Alloy system and wishes to operate a similar business nearby might have legal grounds to challenge the enforceability of the non-compete clause. However, this would likely require legal action to determine the specific circumstances under which the clause might be deemed unenforceable. It is important for prospective franchisees to seek legal counsel to understand their rights and obligations regarding the non-compete agreement in California.

It is also important to note that the franchise agreement specifies that it will be construed and enforced according to its terms in all other respects. However, this general provision is superseded by the specific statement regarding the potential unenforceability of the non-compete clause under California law. This highlights the importance of understanding state-specific addenda to franchise agreements, as they can significantly alter the interpretation and enforceability of certain provisions.