Are "Non-Compete" Clauses in Franchise Agreements Enforceable in New York?

Franchise agreements are a common arrangement in which a well-known branded company licenses its trademarks and business model to a local proprietor. Like any business contract, a franchise agreement imposes certain duties and obligations on the parties, and in the event of a breach by either side, litigation may arise. Franchisees should be especially aware of their rights and responsibilities in the event a franchise agreement is terminated, for whatever reason.

H&R Block Tax Services, LLC v. Strauss

Here is a recent case from upstate New York that illustrates the potential legal perils of franchise agreements. The franchiser in this case is the nationally known tax preparation firm H&R Block. Missouri-based H&R Block uses franchise agreements to license tax preparation offices throughout the country. One such franchisee was a woman in Cobleskill, a small town in Schoharie County with a population of about 6,400. H&R Block initially signed a franchise agreement with the woman in 1984, giving her exclusive rights to operate a franchise within a 45-mile radius of Cobleskill.

The franchise agreement automatically renewed every five years unless either side moved to terminate. H&R Block ultimately informed the woman in 2014 they did not wish to renew their agreement after 30 years. After the franchise agreement expired last September, the woman continued to offer tax preparation at the same Cobleskill location under her own business name.

H&R Block sued, alleging the franchise agreement contained a “non-compete” clause that prohibited the woman from operating a competing tax preparation business within the 45-mile zone for at least one year after the agreement expired (September of this year). Obviously, since tax preparation services are in the highest demand from January until April, H&R Block did not want to lose potential 2015 tax season business to its former franchisee.

On February 4th, U.S. District Judge Lawrence E. Khan sided with H&R Block and issued an injunction against the woman. She is not allowed to run a tax preparation business within Cobleskill, nor may she lease space in town to other tax preparers. Judge Khan noted the non-compete clause was expressly intended to preserve the company's investment in its brand and reputation: “Defendant has built relationships with individuals in need of tax preparation under the benefit of her association with H&R Block, and [H&R Block] stands to lose those client relationships if Defendant is not enjoined from directing those customers to her current operation.”

Although this particular franchise agreement was governed by Missouri law, Judge Khan said H&R Block was equally entitled to its injunction under New York law. Non-compete clauses are a common feature of many franchise agreements, and he found the 45-mile restriction was reasonable “given Cobleskill's rural location,” and the fact that clients were scattered throughout the sparsely populated area. And, even the defendant acknowledged the one-year term of the non-compete clause was not unreasonable.

This is not to say New York courts will always enforce a non-compete clause. A non-compete clause may be invalidated if it is overly broad or restrictive, or if it does not relate to a company's legitimate business interests. As with all contract matters, you should always consult with an experienced New York business attorney before entering into any agreement that contains a non-compete clause. Contact our office today if you would like to speak with an attorney right away.