Aug. 1, 2016
By Kimberly S. Myers, franchise law attorney at law firm Greensfelder, Hemker & Gale, P.C.
Franchisors observing the recent legal challenges facing Jimmy John's would be wise to exhibit caution when restricting former and current employees from working for competitors.
This isn't limited to high-profile chains like Jimmy John's. However, the lawsuit brought against the sandwich chain is a prime example of the dangers of such a policy. In June, the Illinois attorney general sued two Jimmy John’s entities over their allegedly unlawful use of noncompetition agreements.
What were the agreements in question? In essence, Jimmy John's employees could not work for or own another business (for two years within two miles of a Jimmy John's) that made over 10 percent of its revenue from sandwiches.
What do these court challenges mean for other fast casual franchisors?
First, it's a reminder that the agreements they recommend to franchisees could result in liability to the franchisors. The Illinois lawsuit consisted not only the owner of eight Illinois shops but also the franchisor.
Proper communication is critical. Jimmy John’s, which owns eight Illinois units, changed its policy in April 2015 to no longer require employees to sign noncompetition agreements after that date. Jimmy John’s also claimed it had no intention of enforcing the agreements.
However, the complaint asserted those noncompetition agreements were not taken out of the new-hire packets and the company's non-mandatory intentions not communicated to current or former employees.
The Jimmy’s John’s franchisor supposedly stopped recommending the use of the broad noncompetition agreements to franchisees; however, it merely changed the online version of the form and never communicated the policy change to franchisees and didn't take the forms out of circulation. Shortly after the Illinois suit was filed, Jimmy John’s agreed with the New York attorney general to stop using the agreements in its hiring packets in that state as well.
While most franchisors don't require all employees of their franchisees to enter into noncompetition agreements, protecting trade secrets and confidential information is important to every franchise system. Franchisors and franchisees should review their noncompetition agreements to make sure they are reasonable and are tailored to protect the franchisor’s legitimate business interests.
Furthermore, they should ensure that only managerial or other employees who have access to proprietary information or maintain customer relationships are required to sign the noncompetition agreements. In some cases, a confidentiality agreement may be more appropriate.
Franchisors should make sure noncompetition forms are marked clearly with “sample” watermarks. Also, let franchisees know that use of the forms is not mandatory and that they should consult their own legal counsel to determine whether the agreement is suitable for use in their state and in their individual circumstances.
If the sample form is ever modified, franchisors should immediately let franchisees know to stop using the old one. The franchisor should also take all copies of the old form out of circulation.
Finally, enforceability of noncompetition agreements is governed by state law. An attorney experienced in drafting noncompetition agreements and familiar with the laws of the state in which the agreements will be enforced can assist the franchisor in determining the best course.