Colorado Court of Appeals Enforces Non-Compete Against Purchaser of Franchise
In the latest decision involving a non-compete in a franchise agreement, the Colorado Court of Appeals ruled on May 15, 2008 that a franchisor may enforce a non-compete when the non-compete arises from the purchase of an existing franchise.
In Keller Corp. v. Kelley, the defendant Kelley had purchased an existing franchise and entered into a new franchise agreement with the franchisor. The new franchise agreement included a covenant not to compete. When the franchise agreement terminated, Kelley began operating a competing business. In response, the franchisor filed an action seeking injunctive relief to enforce the non-compete. The trial court denied the motion for preliminary injunction and the franchisor appealed.
The court held that the non-compete fell within the ‘sale of business’ exception to the general rule that precludes the enforcement of non-competes. The court acknowledged that non-competes typically are included in contracts for the sale of a business in order to protect the buyer. Nonetheless, it concluded that there was nothing in the statute that limited its application to the protection of buyers.
Importantly, the court noted that it had not reached the issue of whether an agreement establishing a franchise in a territory for the first time would constitute the sale of a “business” within the meaning of the Colorado statute on non-competes. The court wasn’t required to reach that issue because the franchise agreement between Kelley and the franchisor was entered into as part of the transaction in which Kelley had acquired a “going business” from the previous franchisees.
The Court of Appeals also refrained from ruling on whether the geographic reach of the non-compete was reasonable. The trial court had noted that the restriction on competition was “enormous” because precluded competition within a fifty mile radius of any of franchisor’s existing territories, which included franchises in Colorado Springs, Vail, Aspen, Fort Collins, Grand Junction and Thornton. The Court of Appeals merely observed that the reach of the injunction could be limited by the trial court to an area considered by it to be reasonable.
The Court of Appeals previously has addressed non-competes in franchise agreements. In an earlier decision, the Court of Appeals had ruled that a non-compete arising from the sale of an existing franchise could be enforced by the purchaser of the franchise.
