STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5620

January 4, 1980

FRANCHISE INVESTMENT LAW:

Covenant by franchise not to compete during term of franchise

A covenant in a franchise restricting the franchisee from engaging in a competing business during the term of the franchise is valid.

C. E. Mackey

Director

Corporation and Securities Bureau

Department of Commerce

Lansing, Michigan

My opinion has been requested on the following questions:

The Franchise Investment Law, 1974 PA 269; MCLA 445.1501 et seq; MSA 19,854(1) et seq, regulates the offer, sale and purchase of franchises. In 1974 PA 269, supra, Sec. 27(f), the Legislature has expressly recognized that a franchise agreement may contain a provision restricting the franchisee from continuing to conduct substantially the same business in the same area subsequent to the expiration of the franchise. While this statute contains numerous provisions relative to prohibited restrictions in a franchise agreement, it contains no provision which would bar a franchisor from including a provision in the franchise prohibiting the franchisee from establishing a similar business during the life of the franchise agreement. If a franchisor may restrict the activity of a franchisee for a reasonable period of time in the same area subsequent to the expiration of the franchise, in the absence of clear legislative language prohibiting an in-term covenant, there is no reason why a franchisor may not require a prospective franchisee to bind himself to devote his full attention to the operation of a franchise.

Research fails to disclose any Michigan appellate court decision which holds that a franchise agreement containing a covenant prohibiting the franchisee during the life of the franchise to engage in the same business to be invalid. Research of appellate decision in other jurisdictions reveals only the decision in McDonald's System, Inc v Sandy's Inc, 45 Ill App 2d 57; 195 NE2d 22 (1963), where the Court upheld an in-term covenant prohibiting the franchise from engaging in the same business during the term of the franchise. In support of its decision, the Illinois Court of Appeals relied upon Good v Modern Globe, Inc, 346 Mich 602; 78 NW2d 199 (1956). In Good, supra, plaintiff was employed by the defendant and the contract stipulated that he would not become employed by any competing manufacturer during the term of the contract. In suing for the balance of monies allegedly owed under the contract, the employee contended that the agreement not to be employed by a competing manufacturer during the life of the employment contract was void under 1905 PA 329, Sec. 1; MCLA 445.761; MSA 28.61. This statute reads as follows:

The Michigan Supreme Court rejected this argument, stating:

The decision in Good, supra, was followed in Vendo Company v Stoner, 105 Ill App 2d 261; 245 NE2d 263 (1969), and is supported by the decisions in Saul v Thalis, 156 F Supp 408 (D DC 1957), and Harrison v Glucose Sugar Refining Co, 116 F 304 (CA 7 1902).

While the decision in Good, supra, refers to an employment contract, there is no reason why its rationale should not apply by analogy to a franchise agreement in the absence of any statutory prohibition contained in the Franchise Investment Law, 1974 PA 269, supra. A franchisee who freely contracts with a franchisor to refrain from engaging in a competing similar business during the life of the franchise is not contracting to be engaged in no business or no employment so as to deprive him of the means of earning a livelihood or to deprive the community of his free and unrestricted efforts in his field of pursuit. Lyzen v Lyzen, 221 Mich 302; 191 NW 6 (1922).

If a prospective franchisee finds such a covenant to be a burden, he is free to decline entering into the franchise agreement. Having entered into the franchise agreement and received the benefits of it, it is untenable to argue that he is deprived of the means of earning the livelihood or that the community will be deprived of his free and unrestricted efforts in the field of activity he has chosen.

It is my opinion, therefore, that an in-term covenant restricting a franchisee from engaging in a competing business during the term of the franchise is valid.

Turning to your second question, you ask whether the franchisor may terminate the franchise if the franchisee violates the covenant by opening a similar business during the life of the franchise.

1974 PA 269, supra, Sec. 27(e) prohibits effective registration of a franchise which:

As indicated in the answer to your first question, a covenant prohibiting the franchisee from operating a similar business during the life of the franchise is a lawful provision of the franchise. Thus, a franchisee may have his franchise terminated if he operates a competing business during the life of the franchise contrary to the covenant, provided that the failure to comply is not cured, upon written notice, within a reasonable time, but not more than 30 days. The failure of the franchisee to comply with the convenant constitutes good cause for termination of the franchise in accordance with a provision in the franchise permitting termination before expiration of its term for good cause.

Therefore, in response to your second question, it is my opinion that the franchisor may terminate the franchisee's license if the franchisee violates the covenant by opening a similar business during the life of the franchise and fails promptly to cure such failure to observe the covenant.

Frank J. Kelley

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