Middle District of Georgia Judge Strikes Down Non-Competition Covenants in Franchise Agreement of Fantastic Sams Franchisee

Posted by Neal F. Weinrich on

Fantastic Sams Salon Corporation v. Maxie Enterprises, Inc., 2012 WL 210889 (M.D. Ga. Jan. 24, 2012) demonstrates how Georgia’s old common law, which governs agreements containing restrictive covenants which were entered into prior to the enactment of Georgia’s new Restrictive Covenants Act, considers restrictive covenants in franchise agreements in partial restraint of trade and subjects them to strict scrutiny.

In November of 2008, Fantastic Sams entered into a franchise agreement with Maxie Enterprises and Paul Rubin for a Fantastic Sams salon in Watkinsville, Georgia.  The agreement was to be in effect until January 2019.  The franchise agreement contained a two part non-competition covenant.  One covenant restricted the franchisee from competing within a two-and-a-half mile radius of any Fantastic Sam salon for the greater of (a) the remainder of the unexpired term of the agreement had the agreement not been terminated, or (b) for a period of two years from the actual date of the agreement’s expiration or termination.  The other covenant restricted the franchisee for a period of two years following the termination of the agreement from “directly or indirectly participating as an owner, partner, member, director, officer, employee, consultant, lender or agent or serve in any other capacity in any business engaged in the sale or rental of products or services the same or as or similar to those of a Fantastic Sams System, within a five mile radius of the Fantastic Sams Salon operating pursuant to this Agreement.”

In November of 2010, the franchisee notified Fantastic Sams that it was no longer operating the salon as a Fantastic Sams salon.  Fantastic Sams deemed the franchise agreement be terminated as of that date.  Based on the termination date of the agreement, the first covenant identified above would be in effect until January of 2019.

Fantastic Sams brought claims for breach of contract and trade dress infringement.  The Defendants filed a counterclaim seeking a declaration that the restrictive covenants in the franchise agreement were invalid.  The Defendants filed a motion for summary judgment on their claim for declaratory judgment.  In its response to the motion, Fantastic Sams conceded that the first restrictive covenant was unenforceable.  Nevertheless, Fantastic Sams argued that the second restrictive covenant was enforceable and could be severed from the first.

Judge Land, however, rejected this argument.  He found that under Georgia law, restrictive covenants in franchise agreements are subject to strict scrutiny and therefore must be reasonable as to time, territory and scope.  Putting aside whether the covenant could even be severed from the other admittedly unenforceable non-competition covenant, Judge Land found that the second restrictive covenant was unreasonable as to its scope because it precluded the franchisee from competing “in any capacity”.  Citing authorities holding that such a restriction on a former franchisee is over broad, Judge Land granted the Defendants’ motion for partial summary judgment as to the unenforceable non-competition covenants.

This case serves as a reminder that enforcing restrictive covenants in franchise agreements under Georgia’s old non-compete regime can often be “hairy”.