Restrictions On Competition In Your Franchise Agreement
By Eric H. Karp, Esq., General Counsel To NCASEF
I have recently received a number of questions about whether 7-Eleven franchisees are subject to non-competition covenants in their franchise agreements. These questions appear to be generated for two separate and unrelated reasons. First, the non-competition provisions of the franchise agreement changed materially with the so-called 2019 franchise agreement. Second, the United States Federal Trade Commission has recently proposed a rule which would ban non-competition agreements in the employer/employee relationship. But it has also asked for comments on whether that rule should be extended to protect franchisees by restricting or even eliminating non-competition agreements.
Franchisees who are not signatories to the 2019 franchise agreement are subject to a post-term non-compete in section 5(d)(2) of their franchise agreement. This post-term non-competition obligation applies in the event of expiration, termination, or transfer. It prohibits the franchisee from owning, operating, or having a financial interest in a Competitive Business at the site of the store or any other 7-Eleven store within two years of it last being operated as a 7-Eleven store. Note that this provision does not involve a competitive radius and is limited to the actual site of your store or any other store. This means that following the termination or expiration of your franchise agreement, you could operate an independent convenience store across the street from your former franchise location. This form of franchise agreement non-competition provision is substantially less onerous than the typical franchise agreement in other franchise systems.
The 2019 form of franchise agreement entirely eliminated the post-term non-competition provisions, one of the few changes that favored the franchisee. Item 3 of the current form of Franchise Disclosure Document reflects at least two cases where SEI sued former franchisees for violation of the post-term non-competition covenant. But these cases all involved franchisees who are signatories to pre-2019 franchise agreements.
The FTC proposal with respect to non-competition covenants contains the following observations by the Commission:
Many franchise agreements may contain non-compete clauses. By restricting a franchisee’s ability to start a new business, franchisor/franchisee non-compete clauses could potentially stifle new business formation and innovation, reduce the earnings of franchisees, and have other negative effects on competitive conditions similar to non-compete clauses between employers and workers. Franchisor/franchisee non-compete clauses could also potentially be exploitative and coercive in some cases, such as where there is an imbalance of bargaining power between the parties. While the relationship between franchisors and franchisees may, in some cases, be more analogous to a business-to-business relationship, many franchisees lack bargaining power in the context of their relationship with franchisors and may be susceptible to exploitation and coercion through the use of non-compete clauses. For these reasons, the Commission seeks comment on whether the Rule should cover franchisor/franchisee non-compete clauses and why.
While the current 7-Eleven franchise agreement does not have a typical post-term non-competition provision, it does have a number of in-term non-competition provisions.
- Section 5(d)(1) of the franchise agreement prevents the franchisee from owning, operating, or having a financial interest in a Competitive Business which is or is intended to be located within 1/2 mile of any 7-Eleven convenience store.
- Section 15(g)(1) of the franchise agreement prohibits the franchisee from offering or selling any products which directly compete with any Proprietary Products that SEI designates as exclusive. This is material to the franchisee because the company has reported a steady increase in the number of products designated as proprietary (936 such products as of September 2022) and its stated intention to continue to build that channel in the future.
- Paragraph 12 of the Expanded NOW Program Agreement prohibits the franchisees from using any Delivery Providers other than those designated by SEI and prohibits the franchisee from engaging in any other delivery program or services at the store.
Finally, the 7-Eleven franchise agreement has no similar or reciprocal restrictions on SEI and its ability to compete with the franchisee in any channel of distribution. The franchisee has no protected, restricted or exclusive territory.
One of my roles as General Counsel is to keep franchisees fully informed of their rights and obligations under their franchise agreements. My hope is that this article contributes to the fulfillment of that goal. If you or any franchisee you know has any questions about restrictions on competition in his or her franchise agreement, please do not hesitate to contact us.