Following termination of the Management Recruiters franchise agreement, is a franchisee prohibited from encouraging clients to terminate their relationship with the franchisor?
Management_Recruiters Franchise · 2024 FDDAnswer from 2024 FDD Document
17.4. Franchisee's Covenant Not to Compete, Not to Solicit, and Not to Share Confidential Information Following Expiration or Termination. Upon expiration or termination of this Agreement for any reason, Franchisee, its Principals and, as applicable, its partners, members, and its shareholders (and their respective Family Members) shall not, for a period of two (2) years thereafter, (i) have any interest, directly or indirectly, as an owner, manager, employee, operator, consultant, agent, principal, partner, member, stockholder, corporate officer, director or in any other capacity, or in any other manner whatsoever, in any business, venture, program or enterprise the primary function of which is to provide temporary or permanent employee placement, or otherwise engage or participate in any business that is a "competing business" as that term is defined in Section 15.1, (ii) directly or indirectly, induce, influence, or encourage any client or customer of the Franchise Business to alter, terminate, or breach its contractual or other business relationship with Franchisor, or the Franchise Business, or
solicit it to do business with any "competing business" as that term is defined in Section 15.1, (iii) directly or indirectly, solicit for employment or otherwise induce, influence, or encourage to terminate employment with the Franchise Business, or employ or engage as an independent contractor, any person who is a then current employee of the Franchise Business or any business that operates as a franchisee of Franchisor, or (iv) not share with any "competing business" as that term is defined in Section 15.1, any confidential information or Trade Secrets of Franchisor, the Franchise Business, or Franchisee.
17.5. Exceptions; Publicly-Traded Stock. The restrictions in this Section 17.4 shall not apply to ownership of securities traded on a nationally recognized stock exchange that constitute less than three percent (3%) of the shares of the class of securities issued and outstanding, or to the conduct of other Franchise Businesses pursuant to franchise agreements with Franchisor.
Source: Item 23 — RECEIPTS (FDD pages 67–327)
What This Means (2024 FDD)
According to the 2024 FDD, a franchisee of Management Recruiters is restricted from encouraging clients to terminate their relationship with the franchisor after the termination or expiration of the franchise agreement. Specifically, for a period of two years post-termination, the franchisee (including its principals, partners, members, and shareholders) cannot directly or indirectly induce, influence, or encourage any client or customer of the franchise business to alter, terminate, or breach their relationship with Management Recruiters. This restriction also extends to soliciting clients to do business with any competing business.
This non-solicitation clause is designed to protect Management Recruiters' client base and goodwill, which the FDD acknowledges is largely derived from the affiliation with the franchisor and its marks. The agreement emphasizes that the client base should benefit the franchisor, and upon termination, the franchisee must hand over all client-related materials. The franchisee is also barred from contacting these clients to offer similar services for two years following the end of the agreement.
Failure to comply with these terms is considered an unfair method of competition, potentially leading to legal repercussions. However, an exception exists for ownership of securities traded on a nationally recognized stock exchange, provided the ownership constitutes less than 3% of the outstanding shares. This clause ensures that franchisees do not leverage their knowledge and relationships gained during their time with Management Recruiters to unfairly compete against the franchisor after the agreement ends.