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Non-Compete and Forum Selection Clauses in Franchise Agreement Binding on Franchisee Who Signed It and on His Wife Who Didn’t

Posted in Non-Compete Enforceability, Practice & Procedure

A Florida franchisee executed a franchise agreement (FA) containing a non-compete provision and a Pennsylvania forum selection clause.  Following termination of the FA, the former franchisee’s wife opened a similar business in another part of Florida.  The franchisor filed suit in Pennsylvania against the former franchisee and his wife, and they moved to dismiss or, alternatively, to transfer the case to Florida.  The motion was denied.  AAMCO Transmissions, Inc. v. Romano, Civ. Ac. No. 13-5747 (E.D. Pa., 8/21/14).

Summary of the Case

An AAMCO Transmissions FA prohibited competition by the franchisee within 10 miles of any AAMCO franchise for two years from the date of termination.  The FA required that any litigation regarding the FA take place in Pennsylvania where AAMCO is headquartered.  Prior to expiration of the FA, the franchisee and AAMCO entered into a termination agreement.  It gave the franchisee a complete release except with respect to a few identified surviving provisions such as the non-compete, but the forum selection clause was not mentioned.  Shortly after termination, the franchisee’s wife opened a competitive shop 100 miles from the former shop but approximately two miles from another AAMCO franchisee.  AAMCO sued the franchisee and his wife in Pennsylvania.  Without success, they asserted that the forum selection clause did not survive the termination, that the covenant’s geographic restriction was unreasonable, and that venue was inconvenient. 

Applicability of the Non-Compete and Forum Selection Clauses to a Non-Signatory

Robert, the franchisee, owned and operated an automotive maintenance and repair shop in Hollywood, Florida.  After the FA was terminated, his wife Linda opened a similar shop in Stuart, Florida, less than 10 miles from another AAMCO franchise.  In support of their motion to dismiss, Robert and Linda contended that he did not own or operate her shop, and she did not sign the non-compete.  The court cited several cases holding that a non-signatory to a covenant who is “closely related” to a signatory is entitled to the agreement’s benefits but also bound by its obligations.  Moreover, (a) AAMCO alleged that Linda was Robert’s agent in his franchised business in Hollywood, and (b) documents attached to the complaint indicated that they jointly own and operate the Stuart facility.  At the motion to dismiss stage, the trial judge said, it must be assumed that Linda also is subject to the covenant.

Survival of the Forum Selection Clause

The termination agreement contained a broad release with only a few specified exceptions.  One was the non-compete.  However, since the forum selection clause was not listed as an exception, the defendants argued that it did not survive the termination.  The trial judge disagreed.  She cited a half-dozen cases from around the country holding that if a non-compete continues after a contract termination, a forum selection clause does as well.  Further, the dispute obviously related to the FA which stated expressly that any legal “proceedings which arise out of or are connected in any way with this Agreement” must take place in a Pennsylvania court.  Finally, the judge observed that there was no evidence of a clear intent to make the clause inapplicable.

Geographic Restriction

Under Pennsylvania law, according to the judge, “Unreasonableness of the geographic scope of a non-compete is an affirmative defense on which the [defendants] bear the burden of proof.”  Further, “because reasonableness is a fact-intensive inquiry, it should not be determined on the pleadings unless the unreasonableness is clear from the face of the complaint.”  Decisions within the Eastern District of Pennsylvania are split concerning the reasonableness of AAMCO’s 10-mile restriction.  So, the court denied, without prejudice to renewal later, the motion to dismiss based on that restriction.

Inconvenient Forum

The defendants pointed out that they were appearing pro se because they could not afford a lawyer, and that litigating in Pennsylvania would be prohibitively expensive.  They emphasized that the relevant events occurred, and the witnesses and records are located, in south Florida.  That argument failed to carry the day because of the forum selection clause, the FA’s choice of Pennsylvania law, and the location of AAMCO’s headquarters.  The judge said the financial burden on the defendants litigating in Pennsylvania is no greater than the burden on AAMCO if it must litigate in Florida.

Takeaways

Not surprisingly, persons who are “closely related” to the signer of a non-compete can be held equally bound by it.  Further, the judge’s conclusion that venue was proper in Pennsylvania, because AAMCO is headquartered there and the FA selected Pennsylvania as the forum state, was predictable. 

More significant is the court’s refusal to transfer the case to Florida. This case teaches that a court may choose to deny defendants’ well-supported motion to transfer to a “more convenient forum” where the plaintiff chooses to sue in the state referenced in a contractual forum selection clause and has a significant relationship with that state.