FORT LAUDERDALE BUSINESS LITIGATION: GOODWILL AS BASIS FOR A NON-COMPETE AGREEMENT

A party seeking to enforce a restrictive covenant must plead and prove the existence of one or more legitimate business interests. Fla. Stat. § 542.335. The proponent typically claims to have a legitimate business interest in its trade secrets, valuable confidential information that otherwise does not qualify as a trade secret, substantial relationships with specific prospective or existing customers, or specialized training. Id. However, a lesser-known category of legitimate business interest called customer goodwill is also available. Id. The goodwill legitimate business interest usually has to be associated with an ongoing business, a trade name, a trademark, trade dress, a specific geographic location, or a specific marketing area. Id. However, this is not always the case. In this article, we explore the courts’ willingness to expanded the goodwill legitimate business interest to franchisor/franchisee relationships even though these relationships are not specifically defined as goodwill. Peter Mavrick is a Fort Lauderdale business litigation attorney. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

The goodwill legitimate business interest can be used to protect a franchise from unlawful competition. The franchisor assets a claim against its franchisee for violating a non-compete provision and, in turn, the franchisee attempts to defend the claim by asserting the franchisor has no legitimate business interest in protecting the goodwill of a franchise. E.g., Pirtek USA, LLC v. Layer, 2005 WL 8159764 (M.D. Fla. Sept. 23, 2005) (acknowledging that “goodwill associated with a company’s franchise system is not specifically listed in the Florida statute’s non-exclusive list of legitimate business interests.”). However, the franchisee’s argument is usually rejected because courts liken franchise goodwill to trademark goodwill. Id. (While “goodwill associated with a company’s franchise system is not specifically listed in the Florida statute’s non-exclusive list of legitimate business interests, it is akin to (and somewhat overlapping with) trademark-related goodwill.”). The rationale for expanding goodwill to franchises is that the franchisor “developed a system for operating [the business]… thereby develop[ing] good will in its trademarks” and the franchisor “recognized the value of this good will when he purchased the [ ] franchise.” Quizno’s Corp. v. Kampendahl, 2002 WL 1012997 (N.D. Ill. May 20, 2002); see also Economou v. Physicians Weight Loss Ctrs. of Am., 756 F. Supp. 1024 (N.D. Ohio 1991) (“The franchisee has gained knowledge and experience from the franchisor, and to allow the franchisee to use this knowledge and experience to serve former or potential customers of the franchisor would work a hardship and prejudice to the latter.”). As a result, the franchisee should not be permitted to benefit from the franchise it is prohibited from competing against. Servicemaster Residential/Commercial Servs., L.P. v. Westchester Cleaning Servs., Inc., 2001 WL 396520 (S.D. N.Y. Apr. 19, 2001) (“There is a recognized danger that former franchisees will use the knowledge that they have gained from the franchisor to serve its former customers, and that continued operation under a different name may confuse customers and thereby damage the good will of the franchisor.”).

Courts look to several unenumerated factors to determine whether the franchisor has a protectable legitimate business interest in the franchise’s goodwill. One factor is the amount of time and money the franchisor invested in creating the franchise. See Winmark Corp. v. Brenoby Sports, Inc., 32 F. Supp. 3d 1206 (S.D. Fla. 2014). Another factor is the extent to which the franchisor developed operational methods and practices employed by the franchisees that are designed to attract clients. U.S. Lawns, Inc. v. Landscape Concepts of CT, LLC, 2016 WL 9526340 (M.D. Fla. Oct. 31, 2016). And a third factor is the degree to which the franchisor created tools and resources for its franchisees to access and utilize in the operation of the franchisee’s business. Id.

The body of law discussed it this article offers franchisors a unique avenue to pleading and proving the existence of a legitime business interest that would not otherwise be available to other litigants. Franchisors should consider this body of law when drafting restrictive covenant provisions to be included within franchise agreements and litigating claims arising from such restrictive covenant provisions.

Peter Mavrick is a Fort Lauderdale business litigation lawyer, and represents clients in Miami, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.