Non-Competition Covenants May Apply to Individual Franchise Owners, Even if They Never Agree to be Bound

October 27th, 2009

In a recent case out of the Federal District for the Eastern District of Virginia, it was held that a franchise agreement’s non-competition covenant could be applied to an owner of a corporate franchisee who had not signed the franchise agreement or a personal guarantee of the franchisee’s obligations. The facts of the case make the outcome unsurprising, and highlight a rule of federal law that can serve as an important tool for franchisors facing similar situations.

 The case involved a short-lived Little Caesar’s pizza restaurant in Portsmouth, Virginia. Apparently in ongoing discussions with Little Caesar’s, an individual prospective franchisee, Ms. Ross, worked with her partner, Mr. Krever, to acquire a lease and begin building out the leased space to suit a Little Caesar’s franchise. Ms. Ross approached Little Caesar’s about Mr. Krever also becoming a party to the anticipated franchise agreement, but Little Caesar’s refused.

 Despite this refusal, Ms. Ross and Mr. Krever jointly formed Little Caesar’s VA, Inc., and Ms. Ross entered into a franchise agreement with Little Caesar’s on the corporation’s behalf. While the agreement contained provisions requiring all owners to be approved and to sign a personal guarantee, Little Caesar’s was never made aware of Mr. Krever’s ownership interest.

 The franchisee’s restaurant quickly failed and Mr. Krever took over operations, rebranding the restaurant as “Family Pizza Plus”, but continuing to use Little Caesar’s advertising and ingredients. Little Caesar’s sent a notice of default and termination to Ms. Ross, and sent multiple cease and desist notices to Mr. Krever, the unauthorized partner.

 Following Mr. Krever’s refusal to cease operations of Family Pizza Plus, Little Caesar’s sued the franchisee-entity and both owners in federal court. Among other things, the complaint sought injunctive relief to enforce the franchise agreement’s non-competition provisions against both Ms. Ross and Mr. Krever.

 The court awarded Little Caesar’s the relief sought. Despite never signing the franchise agreement or a personal guaranty, Mr. Krever was found to be subject to the franchise agreement’s non-competition provisions. The court cited two reasons for this result. First, Rule 65(d) of the Federal Rules of Civil Procedure grants federal courts the authority to issue injunctions against parties and their “officers, agents, servants, employees, and attorneys.” Second, the court held that the unauthorized partner should not be permitted to benefit from his own fraud and deception. According to the court, had Mr. Krever’s involvement been made known to Little Caesar’s, he would have been required to agree the franchise agreement’s non-competition provisions. The equities clearly favored Little Caesar’s in this case, and accordingly the court issued an order enjoining Mr. Krever from operating the Family Pizza Plus business at the former Little Caesar’s franchise location.

By: Jeffrey S. Fabian

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