Court Enforces Non-Compete Agreements Connected to Franchise Agreements

Carvel Corporation sells retail manufacturing licenses and related goods/services to franchises that operate Carvel ice cream stores.  Misters Leopold and David DePaola operated two such Carvel stores in Waterbury, Connecticut.  The two men contracted with Carvel on November 1, 1990, to obtain a retail manufacturer’s license for Carvel franchise store # 1578 for a period of ten years.  The parties entered into non-compete and trade secrets agreements on March 22, 1991.

On September 11, 1997, the DePaolas entered into an agreement for a license for Carvel franchise store # 2704.  Several restrictive covenants accompanied this second franchise agreement.  The DePaolas were prohibited from operating ice cream stores within two miles of their previous Carvel locations for a period of three years following the abandonment or expiration of each respective license agreement.  Additionally, the covenants stated that legal disputes would be “interpreted, governed, and construed pursuant to New York law”.

On October 31, 2000 the first license agreement expired but Carvel alleged that the DePaolas continued to operate that location as an independent ice cream store.  The company learned a few weeks later that the DePaolas had begun to operate the second location in the same manner, as an independent ice cream store not classified as a Carvel franchise.  Carvel Corp. sued the DePaolas for breach of the restrictive covenants and specifically claimed that they would disclose valuable and proprietary trade secrets during their current and future business activities.

Injunction Request

Carvel requested that the court issue two injunctions: one to order the DePaolas to cease using and to return any and all Carvel property and a second to cease the operation of their independent ice cream stores in order to comply with the non-compete agreements.  The DePaolas were compliant with returning Carvel property but took issue with the company’s request that they cease their operations of the two ice cream stores.  The agreement had a choice of law provision designating New York law as controlling, but the Superior Court of Connecticut sitting in New Britain was able to adjudicate the case because of the similarities in New York and Connecticut laws’ treatment of non-compete and other employment agreements.

The Court’s Findings

The court found in favor of Carvel Corporation and ordered that the DePaolas cease their operations of their two independent ice cream stores in Waterbury, CT in order to comply with the non-compete agreement.  To reach its decision regarding the enforceability of the underlying employment contract between the parties, the court analyzed whether Carvel had a legitimate business interest that warranted protection, the degree to which the restrictions were reasonable, and to what extent the restrictions would make the DePaolas bear occupational hardships.

The court held that Carvel did have a legitimate business interest that was threatened by the DePaolas’ continued business activities.  While the company did not exercise physical control or have a leasehold interest over the stores, the company had an interest in its goodwill and name recognition that was connected to the customers of the DePaolas’ ice cream stores.

Reasonable Restrictions

Next, the court held that the restrictions, both time and geographical, were reasonable in scope and enforceable by an injunction.  The stated purpose of the restrictions was to “prevent dilution of the exclusivity of the valuable Carvel know-how and Carvel trade secrets”.  The restrictions enumerated in the non-compete agreement were firm enough to protect Carvel’s legitimate interest but limited enough so as not to unnecessarily restrict the DePaolas’ economic activities.

The DePaolas claimed that should an injunction be issued, they would “lose both their income and their investment” because the “hardships would be immediate, devastating, and irreparable”.  The court rejected this argument however and held that the DePaolas had entered into the agreements on their own accord without coercion and as such were responsible to bear the risk of hardships that may be the product of the agreements’ terms.

In light of a legitimate business interest and reasonable restrictions, the court granted Carvel’s request for an injunction restraining the DePaolas’ actions in order to prevent further violations of the legally binding non-compete agreements.

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