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Necessary Formality in Franchise Agreements
Courts are often confronted with the pesky problem of enforcing a covenant against competition against non-signatories to a franchise agreement. Few courts have provided guidance on the enforcement of a restrictive covenant against even a family member who colludes with a terminated franchisee to circumvent the post-contract restrictions against competition. Add to this uncertainty the requirement that an arbitration clause cannot be enforced against a non-signatory. Absent perfect drafting, how should a court address an enforcement of a covenant against competition in an arbitration where the party violating the covenant is in collusion with the former franchisee?
A recent federal court decision from Wisconsin suggests that expansive and formal franchise agreements are a necessary evil. At issue in Everett v. Paul Davis Restoration, 2012 U.S. Dist. LEXIS 133682 (E.D. Wis. Sept. 18, 2012), was whether franchise owner Matthew Everett's wife Renee, who did not sign the non-competition covenant, was nonetheless bound by it. The franchisor argued the wife was equitably estopped from avoiding the covenant because she actively participated in running the franchise. The wife, not surprisingly, argued she was not bound because she never signed the covenant. Although the court initially issued a preliminary injunction compelling the wife to arbitrate her claims, thereby suggesting she was bound, it subsequently reversed itself and vacated the arbitration award enforcing the covenant against her personally.
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