In Hamden vs. Total Car Franchising Corporation (November 22, 2013), the U.S. Court of Appeals in the Fourth Circuit distinguished the term “expiration” from “termination” and held that the non-compete clause was not enforceable against a franchisee after the franchise agreement expired.
At the expiration of the franchise agreement, the franchisee advised the franchisor that it was not electing the option to renew and intended to operate a competing business. The non-compete at issue applied to the two year period “following the termination of this Agreement”.
In reaching its decision, the court noted that the franchise agreement did not use the terms “termination” and “expiration” in the same manner. The terms had separate meanings and were not interchangeable. Therefore, the court concluded that the non-compete was not applicable once the agreement expired.
This case serves as a cautionary reminder for franchisors to confirm that their post-term restrictive covenant clauses refer to the termination, expiration and/or non-renewal of the franchise agreement.