Legal Question in Business Law in California

Re: Franchise Non-Compete

Oh boy! This is a tough question to answer. I did a little research and have found that, despite foreign-state choice of law provisions in a contract, California courts often refuse to enforce sister-state judgments where to do so would contravene a strong public policy of California, such as that expressed in Business & Professions Code 16600 which makes void any contract provision whereby anyone is restrained from engaging in a lawful business, trade or occupation.

There has been a significant amount of litigation on this issue, which seems to be your main issue, and I would say that the trend of decisions is favorable to you (California courts would probably be reluctant to enforce the non-compete clause), but it would take more information than I now have about your deal and more research than I can do on a "freebie" to give you reliable advice.

In addition, there may be an issue as to whether your business arrangement falls within the purchase-of-goodwill exemption to B&P 16600 that is expressed in B&P 16601. Probably not, but that would have to be explored.

Finally, even if you lost on the " B&P 16600 strong policy-can't enforce" issue, there would remain a question as to whether the particular non-compete covenant was fair and reasonable or over-reaching. Without knowing something about your business and how geographically compartmentized it is (or isn't), I could not begin to express an opinion.

One more thing that should be pointed out is that, even where non-compete clauses are voided by the courts, there remains the danger that you could be charged with misappropriation of trade secrets if you used the franchisor's customer list, proprietary methods, or the like. What you can and can't do in this arena is likewise the subject of a fair amount of hair-splitting litigation.

Overall, I'd say you have better than a 50-50 chance at escaping liability for ignoring the non-compete clause, but probably less than a 95% chance, and if you are sued, whether you win or lose it can be a big hassle and expense. Your franchise agreement may have an enforceable attorney-fee clause as well, which gives any suit a kind of double-or-nothing risk aspect.

Finally, remember that part of any suit against you would have to be proof of damages. Even if they can enforce the clause, what can they get from suit? It might be hard for them to show to a jury that your competition has cost them a dime of lost profits.