Franchisees Are Not Off the Hook Just Because They Invoke Cancellation Language in the Franchise Agreement
Language contained in a franchise disclosure document (“FDD”) permitting cancellation of the franchise agreement after execution but before the franchise is opened does not rescind the agreement or relieve a franchisee from complying with the non-disclosure and non-competition obligations contained in the franchise agreement. A federal district court in Florida made exceedingly clear in an October 2016 decision that even if a franchise agreement is cancelled and rescinded, its non-disclosure and non-competition obligations can still tie the franchisee’s hands. In other words, franchisors may enforce these obligations even when the franchisee never opens the franchise.
The Twillmans (a married couple) and their adult son, sought to open a franchise of Pirtek USA, LLC in Missouri – selling, assembling, installing, and servicing industrial and hydraulic hoses. The Twillmans received an FDD from Pirtek which stated that the franchise agreement would govern their franchise relationship. The Pirtek FDD, likely mirroring the Pirtek franchise agreement, included a mechanism permitting the cancellation of the franchise agreement before beginning a training program, and for return of the initial franchise fee.
Shortly after receiving the FDD, the Twillmans signed a franchise agreement, executed a guaranty, and submitted a check for half of the initial franchise fee. The franchise agreement included both a non-disclosure obligation for confidential and proprietary information, and a non-compete obligation for a two-year period and 15-mile radius around the franchised territory. It also expressly prohibited rescission of the franchise agreement absent the written agreement of Pirtek
According to the Twillmans, upon return home from a Pirtek “Discovery Day,” it became apparent that establishing a non-union shop would be impossible. Two weeks after entering into the franchise agreement, the Twillmans sent a letter to Pirtek trying to cancel the franchise agreement pursuant to the language contained in the Pirtek FDD – later arguing that cancellation amounted to its rescission. The Twillmans then filed articles of incorporation for a new business that provided essentially the same services as Pirtek and employed two workers whom the Twillmans hired from a nearby Pirtek franchisee. The Twillmans admitted their new business competed directly with the nearby Pirtek franchisee.
Pirtek sought to protect their confidential and proprietary information by enforcing the non-disclosure and non-compete obligations in the franchise agreement. The Twillmans claimed their letter not only cancelled the franchise agreement, but also operated to rescind it along with its non-disclosure and non-compete obligations. The Florida Court decided that the FDD language did not provide a means of cancelling the franchise agreement, and declined to treat cancellation and rescission as one in the same.
The court also determined that even if the Twillmans’ letter cancelled and rescinded the franchise agreement, it would be unjust for the Twillmans to be absolved of their non-disclosure and non-compete obligations. Even rescission of the franchise agreement after disclosure of confidential or proprietary information, therefore, would not affect the franchise agreement’s post-termination non-disclosure and non-compete obligations, according to the Florida Court.
Enforcement of non-compete obligations is a fact-specific undertaking, that is handled differently by courts around the country. At least in Florida, however, it appears that franchisees will not be excused from all compliance with a franchise agreement simply because they elect to cancel the agreement. Franchisors may find support in this case for making a similar argument to enforce non-disclosure and non-compete conditions in their jurisdictions.