Does the Burros Fries Franchise Agreement contain a covenant not to compete that extends beyond the termination of the franchise, and is this enforceable under California law?
Burros_Fries Franchise · 2024 FDDAnswer from 2024 FDD Document
Franchisee agrees that, except as otherwise approved in writing by us, Franchisee shall not, during the term of this Agreement and for a period of two (2) years from the date of (i) a transfer permitted under this Agreement; (ii) the expiration or termination of this Agreement (regardless of the cause for termination); or (iii) a final order of a duly authorized arbitrator, panel of arbitrators, or a court of competent jurisdiction (after all appeals have been taken) with respect to any of the foregoing or with respect to the enforcement of this Section 19.C, either directly or indirectly for itself, or through, on behalf of, or in conjunction with, any person, persons, or legal entity, own, maintain, operate, engage in, be employed by, or have any interest in any business using any aspect of the System, the overall Burros & Fries business concept, with similar Products and/or Services within a ten (10) mile radius of the Accepted Location designated hereunder, or within a ten (10) mile radius of any other System franchise or company-owned business in existence or planned as of the time of termination or expiration of this Agreement as identified in the Franchise Disclosure Document in effect as of the date of expiration or termination of this Agreement.
The unenforceability of all or part of this covenant not to compete in any jurisdiction will not affect the enforceability of this covenant not to compete in any other jurisdictions, or the enforceability of the remainder of this Agreement. This covenant not to compete is given in part in specific consideration for access to trade secrets provided as a part of our training or ongoing support programs. In any jurisdiction in which the covenant contained in this Section 19 or any part of it is deemed not enforceable in whole or in part, Franchisee hereby grants us an option to purchase Franchisee's Business on expiration or termination of this Agreement.
Source: Item 22 — CONTRACTS (FDD page 53)
What This Means (2024 FDD)
According to the 2024 Burros Fries Franchise Disclosure Document, the Franchise Agreement includes a covenant not to compete that extends beyond the termination of the agreement. Specifically, the franchisee agrees not to compete during the term of the agreement and for two years after a transfer, expiration, or termination. This restriction prevents the franchisee from engaging in a similar business within a 10-mile radius of the Burros Fries location or any other existing or planned Burros Fries franchise or company-owned business.
This covenant is designed to protect Burros Fries's confidential information, system, and trade secrets, which the franchisee gains access to through training and support. The agreement states that the unenforceability of the non-compete clause in one jurisdiction does not affect its enforceability in other jurisdictions. Furthermore, if the covenant is deemed unenforceable, Burros Fries has the option to purchase the franchisee's business upon expiration or termination of the agreement.
The Franchise Agreement is governed by California law, but the FDD also notes that the enforceability of certain provisions, including the application of California law itself, may not be guaranteed under California law. This means that while the agreement stipulates California law, a court might rule that specific aspects, such as the non-compete clause, are not enforceable under that law. Franchisees should be aware that California law generally disfavors non-compete agreements, especially those that restrict a person's ability to pursue a lawful profession, trade, or business.
Prospective Burros Fries franchisees should consult with legal counsel to fully understand the implications and enforceability of the non-compete clause in California. They should also inquire with Burros Fries about any specific instances where the non-compete clause has been challenged or enforced, and under what circumstances Burros Fries would exercise its option to purchase the franchisee's business if the non-compete is deemed unenforceable.