A Florida franchisee was sued by a Texas franchisee in a Texas court for violating the franchise’s non-compete agreement when the Florida franchisee hired several former employees of the Texas franchisee. This, despite the fact that employment of the relevant employees was terminated by the Texas franchisee.
The Texas franchisee asserted that although it was not a party to the franchise agreement between the Florida franchisee and the franchisor, the Texas franchisee could enforce the restrictive covenants in the franchise agreement as a third-party beneficiary member of the franchise system. Accordingly, the Texas franchisee was entitled to enforce the non-compete agreements in the franchise agreement between the franchisor and the Florida franchisee and was awarded damages when the Florida franchisee hired several former employees of the Texas franchisee.
Texas courts agreed and awarded damages against the Florida franchisee.
While generally the non-compete agreements are enforced to prevent direct competition within a specific territory or geographical area, this case is a clear reminder that being part of a franchise system come with benefits and burdens which may cross franchise territories or even state lines.
For franchisors, careful attention must be placed when assisting employees of one franchisee in finding employment. Review of applicable franchise agreements and the seeking of releases and permission are imperative actions. Taken to a logical conclusion, the Texas holding can impose liability as a joint tortfeasor or result in an inadvertent material breach of a franchise agreement when a franchisor hires or assists in placing an employee of one franchisee with another franchisee.
For franchisees, review of applicable franchise agreements and obtaining the written consent of both the other franchisee and the franchisor is critical. Further, it is imperative that potential new employers ask the potential new employee if he/she is or was bound by any written restrictions relating to employment.
This case is a clear example of the complexities involved in labor and employment law, and highlights the importance of seeking counsel in such matters.