Keeping Friends and Family Quiet: Can Franchisors Do That?
By Austin Rahskopf
If you buy into a franchise, then the legal rights of your spouse, roommates, and close friends could be implicated via a non-compete and non-disclosure. How? The franchisor would require that those who are part of your household are bound by the same terms as you. Why? Well, to protect the intellectual property of the franchise. But can the franchisor do that? Read on!
Non-Signatories to a Contract
Plain and simple, a non-signatory to a contract is someone who didn't sign the contract. Your wife may have signed a franchise agreement that is 100% under her name (or she has 100% ownership interest in the entity) but you didn't sign the franchise agreement. You weren't at training. It's her business, not yours. So what does that make you? A bound non-signatory.
It is common belief that to be bound by a contract you must have signed it or been in privity to the terms of the contract, e.g., have signed it or recognized a benefit from the contract. However, in the Franchise Industry non-competes are common, and courts have upheld that they apply to third-parties who are non-signatories. This seems to go against common law, requiring parties to have consideration and benefit from a contract to be held by the contract's provisions. But courts reason that if the parties are closely related or acting in concert the non-signatories can be bound. Without this exception, persons who sign a non-compete clause could hide their actions through other persons. For example, if a wife signs a franchise agreement that is 100% owned by her, her husband would still have enough "access" to the business just by the nature of their relationship. He can't use this "inside information" to start a competing business. So say the courts.
Case Law on Non-signatories
In a recent case in Nebraska, Maids Int'l, Inc. v. Maids on Call, LLC, the court articulated the logic behind this apparent disregard of the requirements that contracts be signed, and the parties must have an interest in them to be bound by their provisions. The court stated that “non-signatories may not avoid an injunction simply by being non-signatories to a franchise agreement.” The court relied on the fact that the parties worked in concert together and that the non-signatories would not have started the business without the help of the franchisee who had recently left the franchise. The court reasoned that allowing non-signatories to open businesses that competes with a close friend's franchise would provide a door for franchisees to avoid complying with the terms of the Franchise Agreement they signed.
In Jackson Hewitt Inc. v. H.E.A.T. Enters., LLC, a New Jersey case, the court found that “non-signatory third-parties who are 'closely related to [a] contractual relationship' are bound by forum selection clauses contained in the contracts underlying the relevant contractual relationships.” Again, if you have a close relationship, then the terms of the contract can apply to you.
And finally, in Marshak v. Treadwell, a case out of the 3rd Circuit District Court, the court stated that even family members of a deceased party who was held in contempt could be bound. Though being in contempt is different then being prevented by a non-compete the logic is very similar. A contempt action prevents persons from marketing a trademark, in this case “The Drifters,” a singing group. The court ruled that even family members who were not part of the original case could be held by its ruling.
Bottom Line: Franchise Agreements Can Restrict Close Friends and Family
It is clear that courts have been able to bind non-signatories to non-compete clauses, but can a Franchisor add a clause stating that family members are bound by the non-compete clause in their Franchise Agreement? By the same logic as the courts have used to bind non-signatories to contracts it appears that Franchisors would be able to add this broad clause, if the Franchisor limits the non-compete to individuals that are closely related, or in privity with the franchisee. This relationship factor is key because otherwise anyone who knew the franchisee would be bared from opening a similar business. This would go against free market principles. A friend of a franchise should be able to open a similar business, but if the Franchisor can show that the two friends are acting in concert together to undermine the Franchise Agreement, their actions could be enjoined.
If you're a franchisor and want to make sure your franchisee's family members are properly bound to confidentiality, just get in touch. Contact Karen, franchise attorney, who will be happy to discuss your situation.