Armstrong v. Taco Time Intern., Inc.

• Decision Date: 05 November 1981
• Docket Number: No. 4138-III-7,4138-III-7
• Citation: 635 P.2d 1114,30 Wn.App. 538
• Parties: , 1982-2 Trade Cases P 64,775 Evan L. ARMSTRONG, Appellant, v. TACO TIME INTERNATIONAL, INC., a corporation, Respondent, Joyce Miller, formerly Joyce M. Armstrong; Omni Foods, Inc., a Washington corporation; and Mrs. Evan L. Armstrong, Defendants.
• Court: Washington Court of Appeals

Page 538

30 Wn.App. 538

635 P.2d 1114, 1982-2 Trade Cases P 64,775

Evan L. ARMSTRONG, Appellant, v. TACO TIME INTERNATIONAL, INC., a corporation, Respondent, Joyce Miller, formerly Joyce M. Armstrong; Omni Foods, Inc.,

a Washington corporation; and Mrs. Evan L.

Armstrong, Defendants.

No. 4138-III-7.

Court of Appeals of Washington, Division 3,

Panel Four.

Nov. 5, 1981.

Review Denied Dec. 15, 1981.

Henry E. Stiles, II, Lukins, Annis, Shine, McKay, Van Marter & Rein, Neil E. Humphries, Humphries, Patterson & Lewis, Spokane, for appellant.

Richard D. McWilliams, Spokane, K. Patrick Neill, Hershner, Hunter, Miller, Moulton & Andrews, Eugene, Or., for respondent.

GREEN, Judge.

This appeal involves the validity and application of a covenant not to compete contained in a franchise issued by Taco Time International (TTI) to Evan L. Armstrong.

TTI, founded in 1960, is an Oregon corporation which owns and franchises Taco Time Mexican fast-food restaurants. In June 1965, TTI and Mr. Armstrong entered into a franchise agreement. This agreement granted Mr. Armstrong an exclusive franchise to the geographical area within a 50-mile radius of Spokane and contained the following covenant:

The Second Party (Armstrong) agrees not to compete with the NATACO (now TTI) in the continental United States of America in the sale of Mexican-type food during the term of this franchise and for five (5) years after its termination.

Although TTI prepared the agreement, before Mr. Armstrong signed it his attorney reviewed it. Pursuant to the franchise, Mr. Armstrong, by 1977, developed eight Taco Time restaurants within the franchise area, three of which he subfranchised to others in return for franchise fees and royalties.

In 1976, Mr. Armstrong purchased an existing Taco Time franchise and restaurant in Wenatchee. On May 26, 1977, after the expiration of this franchise, Mr. Armstrong changed the name to Taco Mejico. Shortly thereafter, TTI resold the Wenatchee area to another franchisee who opened a Taco Time restaurant.

Also in 1977, without the consent of TTI, Mr. Armstrong, through OMNI Foods, Inc., a corporation of which Mr. Armstrong is the controlling stockholder and president, constructed and opened a Mexican fast-food restaurant called Taco Mejico within the Spokane franchise area. TTI objected. When Mr. Armstrong refused to convert the Taco Mejico restaurant to Taco Time, TTI gave Mr. Armstrong 10 days within which to change the name or it would sue for breach of the covenant not to compete.

Before the time expired, Mr. Armstrong filed this action on July 18, 1977 to declare the covenant not to compete null and void or, in the alternative, to limit the covenant's application to an area identical with the franchised area. TTI filed a counterclaim, alleging Mr. Armstrong was in violation of the covenant not to compete and sought a permanent injunction and damages in the amount of $800,000.

Prior to and during trial, Mr. Armstrong changed the names of all his Taco Time restaurants to Taco Mejico. He also commenced an action against his subfranchised Taco Time restaurants who failed to pay him royalties under their franchise agreement. On October 13, 1978, Mr. Armstrong opened a Taco Mejico restaurant in Kennewick, one-half mile from an existing franchised Taco Time restaurant.

Following a bench trial, the court in substance found: (1) neither party seeks termination of the franchise; (2) TTI franchise rights are very valuable; (3) it is undisputed all of Mr. Armstrong's Taco Mejico restaurants are operating in violation of the covenant and Mr. Armstrong admits he took a calculated risk that the covenant would be enforceable; (4) TTI has an interest in enforcing the covenant to protect its ability to sell new franchise rights and to protect existing franchisees from competition by a fellow-franchisee; (5) the covenant is reasonable as written so long as the franchise has not been terminated; (6) the covenant is overbroad in the post-term context; (7) enforcement of the covenant is not unreasonable discrimination under the Franchise Investment Protection Act; and (8) there is no evidence showing enforcement would violate the Sherman Antitrust Act.

Based on these findings, the court concluded: (1) the covenant is enforceable as written so long as the franchise agreement has not been terminated; (2) after termination, the covenant is enforceable to the extent it is reasonable, i. e., for 21/2 years within the area of the franchise agreement and within a 25-mile radius of any Taco Time restaurant established prior to commencement of the competitive activity; (3) operation of Taco Mejico restaurants violates the covenant and TTI is entitled to an injunction; (4) Mr. Armstrong has the option of reopening Taco Mejico restaurants located in the franchise area as Taco Time restaurants pursuant to the terms of the franchise agreement; (5) TTI is entitled to recover lost royalties and franchise fees, with interest, until paid; and (6) Mr. Armstrong is enjoined from conveying to anyone else the name Taco Mejico or the business location where he has operated under that name unless the purchaser and his successors and assigns agree not to use the location for a Mexican fast-food restaurant for 21/2 years from (1) the closing of the conveyances, or (2) termination of the franchise agreement, whichever comes first. From the judgment entered upon these conclusions, Mr. Armstrong appeals.

First, Mr. Armstrong contends the court erred in concluding he could not challenge the reasonableness and enforceability of the covenant not to compete during the term of the franchise. He argues this determination frustrates the purpose of the Uniform Declaratory Judgment Acts, RCW 7.24, under which his action was commenced, by not declaring his "rights, status, and other legal relations under the franchise agreement." We disagree.

Preliminarily, the court did not find or conclude Mr. Armstrong could not challenge the covenant as long as the franchise had not been terminated. Rather, the court found:

The covenant not to compete is reasonable as written for so long as the franchise agreement has not been terminated.

and concluded:

The covenant not to compete contained in Paragraph 9 of the franchise agreement is fully enforceable against Mr. Armstrong as written so long as the franchise agreement has not been terminated.

If Mr. Armstrong were not allowed, as he contends, to challenge this particular term of the franchise while it was still in effect, the court would have dismissed the complaint without a trial or further proceedings. Instead, the court considered the covenant and declared the parties' rights-the precise relief sought in the complaint. The primary question is whether that declaration is correct.

Mr. Armstrong takes the position the covenant is unreasonable as written and, therefore, should not be enforced. ¹ Although the validity and construction of covenants not to compete contained in franchise agreements have not been directly addressed in this State, the rules generally applicable to such covenants in other types of agreements may be used. Annot., Validity and construction of restrictive covenant not to compete ancillary to franchise agreement, 50 A.L.R.3d 746 (1973). Courts agree a franchise agreement is akin to an employment contract. Budget Rent-A-Car Corp. v. Fein of America, 342 F.2d 509 (5th Cir. 1965); Mansfield v. B & W Gas, Inc., 222 Ga. 259, 149 S.E.2d 482 (1966); H & R Block, Inc. v. Lovelace, 208 Kan. 538, 493 P.2d 205, 50 A.L.R.3d 730 (1972). In Washington, covenants not to compete contained in employment contracts are enforced to the extent they are reasonable and lawful, giving special consideration to time and area restrictions. Sheppard v. Blackstock Lumber Co., 85 Wash.2d 929, 933, 540 P.2d 1373 (1975). In such cases, "reasonableness" is a question of law. Alexander & Alexander, Inc. v. Wohlman, 19 Wash.App. 670, 684, 578 P.2d 530 (1978). The trial court properly determined the covenant as written is overbroad. However, it does not follow the covenant must fail because it is unreasonable as to time and area. Wood v. May, 73 Wash.2d 307, 312, 438 P.2d 587 (1968). In this State, our courts will enforce a restriction to the extent it is reasonable. Under this rule, a court may modify the covenant even though the offending portion is grammatically indivisible from the remainder of the covenant. Wood v. May, supra at 312-13, 438 P.2d 587; Sheppard v. Blackstock Lumber Co., supra at 934, 540 P.2d 1373.

Here, the court modified the covenant as to its post-term application reducing both the time and area restrictions but declined to modify the covenant during its term, relying upon two Illinois cases: McDonald's Sys., Inc. v. Sandy's Inc., 45 Ill.App.2d 57, 195 N.E.2d 22 (1963); and Vendo Co. v. Stoner, 105 Ill.App.2d 261, 245 N.E.2d 263 (1969), appeal from remand 13 Ill.App.3d 291, 300 N.E.2d 632 (1973). Illinois is the only state which has held a covenant cannot be challenged so long as the franchise has not been terminated. Generally, the courts examine the covenant and enforce it to the extent it is determined to be reasonable without regard to whether the basic agreement has terminated. Unishops, Inc. v. May's Family Centers, Inc., 399 N.E.2d 760 (Ind.App.1980); Winrock Enterprises, Inc. v. House of Fabrics of New Mexico, Inc., 91 N.M. 661, 579 P.2d 787 (1978); John Roane, Inc. v. Tweed, 33 Del.Ch. 4, 89 A.2d 548 (1952); Irving Inv. Corp. v. Gordon, 3 N.J. 217, 69 A.2d 725 (1949); Fullerton Lumber Co. v. Torborg, 270 Wis. 133, 70 N.W.2d 585 (1955); Insurance Center, Inc. v. Taylor, 94 Idaho 896, 499 P.2d 1252 (1972). We are not inclined to follow the Illinois rule. To do so could result in the enforcement of unreasonable covenants. Thus, the court erred to the extent it determined that the covenant would be enforced as written during the term of the Taco Time franchise. Consequently, the words ...