July 28, 2008

GEORGIA COURT HOLDS NONCOMPETITION COVENANTS UNENFORCEABLE

The Court of Appeals of Georgia has upheld a lower court’s decision that the in-term noncompetition covenants contained in Atlanta Bread Company’s franchise agreement are unenforceable as a matter of
law (Atlanta Bread Company International, Inc. v. Lupton-Smith, 2008
WL 2264863 (Ga. App., 2008)). The outcome serves as a warning for franchisors against taking the enforceability of in-term noncompetition covenants for granted.

The case began when Atlanta Bread Company learned that Lupton-Smith, a multi-unit franchisee, had opened a PJ’s Coffee and Lounge. PJ’s offers food items similar to those featured at Atlanta Bread Company businesses and allegedly uses much of the same equipment and methods as an Atlanta Bread Company business. Atlanta Bread Company then sought to terminate its franchise agreements with Lupton-Smith.

The in-term covenant in question stated that the franchisee and its principals could not, without franchisor’s prior written consent, “directly or indirectly engage in, or acquire any financial or beneficial interest in (including any interest in corporations, partnerships, trusts, unincorporated associations or joint ventures), advise, help, guarantee loans or make loans to, any bakery/deli business whose method of operation is similar to that employed by store units within the System.” The post-termination covenant in Lupton-Smith’s agreement prohibited the same activities for one year after termination of the franchise agreement within 20 miles of any Atlanta Bread Company business.

We have prepared a brief summary of the issues behind the Lupton-Smith decision. Please read it here.

ASSUMING A FRANCHISE AGREEMENT IN BANKRUPTCY? IT’S NOT ALWAYS AS EASY AS 3-6-5


Section 365 of the United States Bankruptcy Code permits a trustee to either: (1) assume; (2) reject; or (3) assume and assign to a third party the debtor’s interest in an executory contract or unexpired lease. This statutory right is often a principal motivation for a troubled debtor to seek bankruptcy protection. However, this right is limited by Section 365(c), which states that “[t]he Trustee may not assume and assign any executory contract ... if applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor ... [if] such party does not consent to such assumption or assignment.”

Wellington Vision, Inc. v. Pearle Vision, Inc. (In re: Wellington Vision, Inc.), 364 B.R. 129 (S.D. Fla. 2007), discusses the limitations raised by Section 365(c) in the context of a franchise agreement. In that case, Pearle Vision sought relief from the automatic stay to terminate a franchise agreement with Wellington Vision, arguing that Wellington could not assume the agreement because it included a non-exclusive license of Pearle Vision trademarks.

For our readers, we have prepared a brief overview of this decision.

Please read it here.