U.S.A.: Enforcement of Noncompete Covenants in Internet Sales.

Carl ZWISLER | USA | 2011-04-18


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Covenants not to compete are often used to prevent a former franchisees from continuing to benefit from the goodwill, and know how acquired as a franchisee after their agreements expire or terminate. Most US states evaluate the validity of post-termination non-compete covenants by considering whether they have a legitimate business purpose, and whether they are reasonable in time, geographic scope, and substantive breadth. Sales of merchandise over the internet present a new issue for courts, because such sales could potentially reach any place on the globe.

The franchise agreement at issue in Wild Bird contained a noncompete covenant that prevented the former franchisee from operating a similar business within a twenty-mile radius of its former territory, or within twenty miles of any other franchisee’s territory. Wild Bird sought to enforce the covenant and prevent, among other things, the former franchisee’s operation of a competing internet business. The court decided that the covenant not to compete would apply to the internet business so that it would have the same effect as it would have when applied to brick and mortar stores. The court held that the former franchisee could not make sales over the internet to customers who lived within twenty miles of the former franchisee’s protected territory or within twenty miles of the territory of any other Wild Bird franchisee.

In issuing its decision, the court stated ‘it’s going to have to be plainly and obviously put forth on his website that these sales and services are not available to those people who live within the geographic limitations that violate the covenant not to compete. That’s going to be his responsibility to make sure he does that, if he decides to pursue the web-based business.’

The court, however, did not prevent the franchisee from making sales through the internet business to customers outside of the protected areas, even though the former franchisee’s internet business was run from inside his former protected territory.



Carl E. Zwisler, IDI franchising Country Expert for U.S.A. and Maisa Jean Frank.


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