Franchisee Must Comply with Reasonable Post-Termination Obligations in Franchise Agreements

A recent federal court decision underscores courts’ willingness to enforce clear language in franchise agreements imposing reasonable post-termination obligations on franchisees held to be in breach. 

Case Background

BrightStar Franchising, LLC, a franchisor of in-home care agencies, had four franchise agreements with Foreside Management Company and its principals, Mark and Claire Woodsum. The agreements contained numerous post-termination obligations such as restraints on competition and solicitation, prohibitions on using BrightStar’s confidential information, and requirements to return property and customer data and to transfer telephone numbers. Critically, the franchise agreements also called for the application of Illinois law in the event of litigation. Furthermore, two collateral lease assignments for Foreside’s Newport Beach and Mission Viejo, California, office locations supposedly granted BrightStar possession rights upon termination of the franchise agreements.

When the agreements expired, Foreside declined renewal and started operating its in-home care services outside of the BrightStar franchise system. BrightStar filed suit in the U.S. District Court for the Northern District of Illinois and sought a motion for preliminary injunction against Foreside and the Woodsums, individually, seeking: 

• Foreside’s surrender of both Newport Beach and Mission Viejo offices under the collateral lease assignments; and
• Enforcement of post-termination obligations under the franchise agreements.

Post-Termination Covenants in a Commercial Relationship are Judged for Reasonableness and not Per Se Invalid

Although the franchise agreements included an Illinois choice-of-law provision, Foreside and the Woodsums argued that California law should apply because a California statute, Business Code §16600, invalidated the non-compete obligations. The Court found that even under California law post-termination covenants in a commercial relationship are judged for reasonableness and not invalid per se. On this basis, the Court analyzed whether to apply California or Illinois law to the question of the enforceability of the post-termination obligations. The Court held Illinois law applied because the defendants failed to prove there was a conflict between the laws of the two states that would lead to a different outcome on the merits.

The Holding

1. The Court Did Not Enjoin the Assignment of the Leases 

The Court found the Newport Beach lease assignment valid but moot as the defendants had surrendered the office anyway, and Brightside was able to take control of the property. The Mission Viejo lease was also void because Foreside owned the property outright and could not lease to itself. So, there was no lease for Brightstar to assume. 

2. The Post-Termination Restrictions Were Reasonable 

Applying Illinois law, the Court found BrightStar’s covenants which included an 18-month duration, 25-mile geographic restriction, and protection of legitimate business interests such as goodwill, proprietary systems, and customer relationships reasonable.

The Court found that the defendants likely breached nearly every post-termination provision through continued use of confidential information and customer data, operating a competing business in prohibited territory, soliciting former clients, holding themselves out as a BrightStar franchisee, retaining customers’ phone numbers, using elements of BrightStar’s proprietary program, and displaying BrightStar signage. 

3. Irreparable Harm and Public Interest Weighed in BrightStar’s Favor

The Court characterized violations of restrictive covenants as a “canonical” example of irreparable harm explaining loss of goodwill, confidential data, and brand control are intangible and difficult to measure. In weighing the balance of potential harms, the Court found the harm to BrightStar outweighed any harm the defendants would suffer if the injunction was issued. The Court found that the defendants had intentionally declined renewal of the agreements and breached the post-termination covenants. Public interest favored enforcing valid franchise agreements, which would have minimal disruption to client care due to nearby BrightStar agencies.

The Court granted BrightStar’s request for a preliminary injunction, in part, enforcing post-termination obligations under the franchise agreements but, as mentioned above, denied the request to enjoin the assignment of the leases.

Why The Decision Matters

• This decision emphasizes the enforceability of choice-of-law clauses in franchise agreements and clarifies California Business Code §16600 does not automatically void post-termination restrictive covenants in commercial contexts.
• For franchisors, the ruling underlines the importance of reasonable scope and duration in covenants and demonstrates strong judicial protection for reasonable post-termination obligations.
• For franchisees, the decision cautions that terminating a franchise without complying with post-termination obligations risks swift injunctive relief and potential operational shutdown.