A commercial real estate relocation and consulting business franchisor (Relo) succeeded in getting a preliminary injunction to enforce a non-compete covenant against a former franchisee.

During the term of the franchise, a franchisee formed a competing company to offer similar services to those of Relo. The new company employed all the franchisee’s employees. The franchisee sent notice of the new business name to industry contacts, announcing it was “rebranding” the franchise. The franchisee gave notice to Relo that it was terminating the franchise agreement to work for the new company. Relo notified the franchisee that it was in breach of the non-compete covenant and sought a preliminary injunction to enjoin the franchisee from operating the competing business.

The franchisee argued the agreement was unenforceable under the Ohio Business Opportunity Act and common law because Relo fraudulently induced the franchisee to enter into the agreement with improper financial performance representations. Relo admitted showing the franchisee profit and loss statements but not until the franchisee’s “training week” which was after the franchisee received disclosures and signed the franchise agreement. The court found that Relo complied with the law regarding financial disclosures and that the franchisee did not have the allegedly false statements when it entered into the franchise agreement and thus could not have relied on them in deciding to sign the franchise agreement.

Franchisees should carefully review non-compete clauses in their franchise agreements. If the relationship with the franchisor goes sour, a non-compete covenant can preclude the franchisee from forming and operating a competing business. This is true even if the franchisee believes the franchisor breached the franchise agreement or committed fraud to convince the franchisee to enter into the franchise agreement.

Relo Franchise Services, Inc. v. Connor Gilman, et al., Case No. 1:18-cv-578 (S.D. Ohio Jan. 25, 2019)