As mentioned in a previous blog entry, the U.S. Court of Appeals for the Ninth Circuit held in Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277 (9th Cir. 2009), that an in-term (during the term of the contract/relationship) covenant not to compete governed by California law was enforceable to the extent that it did not foreclose competition in a substantial share of a business, trade, or market.
The Court overturned an arbitrator’s ruling that permitted a nationwide in-term covenant not to compete as a “manifest disregard of the law.” The Court relied on an apparent variant of the Ninth Circuit’s “narrow restraint” doctrine and older California state law authority to support a watered-down version of the covenant not to compete.
As detailed in a recent article on Comedy Club authored by Robert Milligan and Jim McNairy and published in Business Law News ("BLN") Comedy Club is a significant decision because (1) the Court’s ruling relied in part on the so-called “narrow restraint” exception to California’s statutory prohibition against covenants not to compete, even after the California Supreme Court had just expressly rejected the narrow restraint exception in Edwards v. Arthur Andersen, 44 Cal. 4th 937 (2008); and (2) arbitration decisions are notoriously difficult to overturn, but the Ninth Circuit had little trouble doing so in Comedy Club.
As Robert and Jim explain in the BLN article, in light of Comedy Club, in-term covenants not to compete may be enforceable in the franchise context in California “to protect trademarks, trade names, and goodwill of a licensor” if they are narrowly tailored and do not foreclose a party from engaging in its business or trade in a substantial section of the market.