In the Potbelly Sandwich Works SDAA, what does it mean for a covenant to be 'blue penciled'?
Potbelly_Sandwich_Works Franchise · 2025 FDDAnswer from 2025 FDD Document
10.01 Severability and Substitution of Provisions. Except as expressly provided to the contrary in this SDAA, each section, paragraph, term, and provision of this SDAA is severable, and if, for any reason, any part is held to be invalid or contrary to or in conflict with any applicable present or future law or regulation in a final, unappealable ruling issued by any court, agency, or tribunal with competent jurisdiction, that ruling will not impair the operation of, or otherwise affect, any other portions of this SDAA, which will continue to have full force and effect and bind the parties. If any covenant restricting competitive activity is deemed unenforceable by virtue of its scope in terms of area, business activity prohibited and/or length of time, but would be enforceable if modified, you and we agree that the covenant may be "blue penciled" or reformed and then enforced to the fullest extent permissible under the laws and public policies applied in the jurisdiction whose law determines the covenant's validity.
Source: Item 23 — RECEIPTS (FDD pages 79–355)
What This Means (2025 FDD)
According to Potbelly Sandwich Works' 2025 Franchise Disclosure Document, 'blue penciling' refers to modifying a covenant that restricts competitive activity to make it enforceable. Specifically, if a court deems a non-compete covenant too broad in terms of area, prohibited business activity, or time length, both Potbelly Sandwich Works and the franchisee agree that the covenant can be modified or 'reformed.'
This modification allows the covenant to be enforced to the fullest extent permissible under the applicable laws and public policies of the relevant jurisdiction. In essence, rather than striking down the entire covenant, the court can narrow its scope to make it legally sound and effective. This ensures that some level of protection against competitive activity remains in place, safeguarding Potbelly Sandwich Works' interests.
For a prospective franchisee, this means that the non-compete agreement they sign is not necessarily an all-or-nothing proposition. If certain aspects of the covenant are deemed unreasonable, they can be adjusted to comply with legal standards, while still providing Potbelly Sandwich Works with some protection. This clause aims to strike a balance between protecting the franchisor's business interests and ensuring the franchisee's ability to operate and earn a living after the franchise agreement ends.