What Is the “Blue Penciling” Rule in Franchise Non-Compete Agreements?

If you are a franchisor, you will likely want to protect your goodwill and intellectual property with restrictive covenants and non-compete provisions that preclude your franchisees from competing with you after they end their franchising relationship. You might be surprised to learn, however, that even with choice-of-law clauses in your franchise agreement, different states can use “blue pencil” processes to rewrite or completely reject your non-competes to conform with their policies.

The business franchise legal team at Franchise.Law offers experienced guidance on the “blue penciling” rule in franchise non-compete agreements and on how you can draft a non-compete that withstands scrutiny in different states. Our lawyers are licensed in North Carolina and Florida and represent franchisors across the country, working with local counsel where enforcement in another state calls for it. Franchising regulation is primarily governed by federal law, but our attorneys also have in-depth knowledge of state-specific matters, including blue-penciling, that we use to advise franchisors throughout the United States.

How Does the Blue Penciling Rule Work?

Strictly speaking, blue penciling means a court strikes offending words from a covenant rather than rewriting it, while other states go further and reform the covenant into something they consider reasonable. Courts and lawyers often use the term loosely to cover both, and the practical question for a franchisor is which approach a given state takes. For example, suppose that your franchise agreement restricts former franchisees from operating a competing business for five years after termination of the franchise relationship, or precludes the former franchisee from opening a competing business anywhere within 300 miles of the franchisee’s former location. If a state court perceives those restrictions to be excessive, it might “blue-pencil” edit the agreement to reduce the duration of the restriction to two years, or cut back the geographic scope to 50 miles.

Franchisors that have multi-state operations should understand that the blue-pencil rule is not consistent from state to state. A state court might:

• Adopt a stricter blue-pencil rule where the judge only deletes certain words or terms from your franchise non-compete without rewriting those terms
• Refuse to enforce the non-compete to any extent rather than trying to rewrite it
• Reform the non-compete under principles of equity, as described in the above example, to arrive at restrictions that the court deems to be reasonable

Given the state-to-state variation in application of the blue-pencil rule, your franchise will benefit most from legal counsel, like the attorneys at Franchise.Law, that can draft non-compete provisions that are more likely to survive challenges in every state.

What Non-Compete Provisions Are More Likely to Survive Blue-Penciling?

A franchise non-compete agreement is more likely to survive the blue-pencil rule if it is drafted with an understanding of the purpose of the rule. In general, states do not want non-competes to be any broader than what is necessary to protect a franchisor’s business and operations against competition from former franchisees who gained knowledge of how those operations work.

In view of this, a franchise non-compete agreement may be more enforceable if it precludes former franchisees from:

• Selling products or services that are identical to those sold by the franchisor
• Dealing with the same suppliers and vendors that the franchisor relies on for its own operations
• Marketing or advertising to the same customer base that the former franchisee had targeted
• Using the same formulas or business processes that were developed by the franchisor
• Opening a new business in the immediate vicinity or within a smaller region around the former franchise’s location

Our lawyers could review your specific agreement to determine whether it is likely to be enforced.

Call Us for More Information on the “Blue Penciling” Rule in Franchise Non-Compete Agreements

Please call Franchise.Law at your earliest convenience to schedule a consultation with an experienced attorney to learn more about the “Blue Penciling” rule in franchise non-compete agreements and how it can affect your franchise.