Boulanger v. Dunkin' Donuts Inc.
815 N.E.2d 572, 21 I.E.R. Cas. (BNA) 1476, 442 Mass. 635 (2004)
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Rule of Law:
Covenants not to compete stemming from franchise agreements are enforceable under Massachusetts law if they are reasonable in scope, protect a legitimate business interest, and are consonant with the public interest, and are evaluated with a less critical eye, similar to covenants made in the sale of a business.
Facts:
- In the late 1970s, the plaintiff began working as an employee for a Dunkin’ Donuts franchise and eventually became a general manager for several franchises.
- In August 1996, the plaintiff purchased his first Dunkin’ Donuts franchise in Syracuse, New York, and signed a franchise agreement that included a covenant not to compete.
- The covenant restricted the plaintiff from owning or working for a competing business within five miles of any Dunkin’ Donuts establishment for two years after the expiration or termination of the agreement.
- The plaintiff purchased two additional Dunkin’ Donuts franchises in March 1999 and October 2000, each time signing similar franchise agreements with non-compete clauses, and was represented by counsel for each signing.
- In February 2002, the plaintiff sold his three franchises to a third party, profiting approximately $72,000.
- In July 2002, the plaintiff moved to New Hampshire.
- Before his covenant not to compete expired, the plaintiff contacted Honey Dew Donuts about potential employment or franchise ownership, but Honey Dew Donuts declined further discussion upon learning of his covenant with Dunkin’ Donuts.
- Dunkin’ Donuts refused the plaintiff’s request to waive the covenant not to compete.
Procedural Posture:
- The plaintiff filed a complaint in Superior Court seeking a declaratory judgment that the covenant not to compete was unenforceable regarding both employment by, and opening of, a competing business in Massachusetts and New Hampshire.
- The plaintiff also sought damages under G. L. c. 93A, § 11, claiming that Dunkin' Donuts engaged in an unfair trade practice, and claimed the covenant was unfair under common law.
- After a bench trial, the Superior Court judge issued an order for judgment, holding that the covenants not to compete did not violate Massachusetts law and entered judgment for the defendant.
- The plaintiff applied for direct appellate review to the Massachusetts Supreme Judicial Court.
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Issue:
Are covenants not to compete contained within franchise agreements enforceable under Massachusetts law, particularly regarding restrictions on former franchisees from owning or working for a competing business?
Opinions:
Majority - Ireland, J.
Yes, covenants not to compete stemming from franchise agreements are enforceable under Massachusetts law because they are reasonable in the circumstances, particularly when viewed similarly to covenants made in the sale of a business, and protect legitimate business interests. The court found that the covenant was more akin to a sale of business covenant, rather than an employment covenant, because the plaintiff was an independent contractor, paid for the franchise, received substantial consideration (including long-term contracts and protection from competition by other former franchisees), was represented by counsel, and profited from the sale of his franchises. The court determined that Dunkin' Donuts had a legitimate business interest in protecting confidential information (such as operating manuals, recipes, financial data, marketing strategies, and site development information) and the integrity of its entire franchise system. The two-year time limit was deemed reasonable, and the five-mile geographic restriction from any Dunkin’ Donuts store was also found reasonable, as the covenant aimed to protect the franchise system as a whole from the use of confidential information by former franchisees to harm other franchisees. The court noted that the covenant did not prohibit all employment and was consonant with the public interest, rejecting claims that it created an undue hardship or was an unconscionable contract of adhesion.
Analysis:
This case establishes an important precedent for the enforceability of non-compete clauses in franchise agreements, distinguishing them from traditional employment contracts and often analogizing them to the sale of a business. It broadens the scope of what constitutes a 'legitimate business interest' to include the protection of the entire franchise 'system,' not just specific trade secrets or goodwill of a single location. Future cases involving franchise non-competes will likely face a higher bar for challenging such restrictions, as courts will apply a less critical standard and recognize the franchisor's interest in systemic protection across a broader geographic area.
