Boulanger v. Dunkin' Donuts Incorporated, SJC-09215 (MA 10/1/2004)
| Decision Date | 01 October 2004 |
| Docket Number | SJC-09215 |
| Citation | 442 Mass. 635 |
| Parties | CRAIG BOULANGER vs. DUNKIN' DONUTS INCORPORATED. |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Contract, Agreement not to compete, Franchise agreement.
Civil action commenced in the Superior Court Department on July 16, 2002.
The case was heard by Patrick F. Brady, J.
The Supreme Judicial Court granted an application for direct appellate review.
Kevin R. McCarthy for the plaintiff.
Robert A. Murphy (Matthew L. Lunenfeld with him) for the defendant.
Steven K. Fedder, of Maryland, Bruce E. Falby, Lewis G. Rudnick, & Lee J. Plave, for International Franchise Association, amicus curiae, submitted a brief.
Present: Marshall, C.J., Greaney, Ireland, Spina, Cowin, Sosman, & Cordy, JJ.
This case raises the first impression issue whether covenants not to compete are enforceable where they stem from franchise agreements. The plaintiff, a former owner of Dunkin' Donuts franchises located in upstate New York, signed covenants not to compete as part of his franchise agreements with the defendant, Dunkin' Donuts Incorporated (Dunkin' Donuts). In relevant part, the agreements restricted the plaintiff, inter alia, from owning or working for a competing business within five miles of any Dunkin' Donuts establishment, for two years after the expiration or termination of the agreements. We granted the plaintiff's application for direct appellate review to consider whether a Superior Court judge erred where, after a bench trial, he held that the covenants not to compete did not violate Massachusetts law. Because we conclude that, in the circumstances of this case, giving due consideration to the fact that Dunkin' Donuts was protecting the very franchise system from which the plaintiff himself benefited, the covenants not to compete were reasonable, we affirm the judgment.
Facts and procedural background. We present the relevant facts as found by the judge, supplementing them as necessary, and reserving certain details for our discussion of the issues.
The defendant is a worldwide franchisor of doughnut and coffee shops1 that contracts with independent business persons who use the trade names, trademarks, recipes, and system developed by the defendant. The defendant interfaces with its franchisees through business consultants who organize and conduct district meetings several times a year. The defendant also allows certain high-performing franchisees to enter into a territorial development program whereby, for a fee, the defendant sets aside a particular territory for the franchisee, and the franchisee is expected to locate and develop potentially favorable sites for additional franchised shops.
The plaintiff began working as an employee for a Dunkin' Donuts franchise in the late 1970's. He worked his way up, eventually becoming a general manager in charge of several franchises owned by another franchisee. The judge found that in August, 1996, the plaintiff purchased his own franchise from the defendant, in Syracuse, New York.2 The franchise agreement contained a clause (Section 8) which states in relevant part:
"During the term of this Agreement . . . and for a period of two (2) years after the expiration or termination of this Agreement, regardless of the cause of the termination . . . [the] FRANCHISEE . . . shall [not] . . . own, maintain, engage in, be employed by, or have any interest in any other business which sells or offers to sell the same or substantially similar products to the type offered by Dunkin' Donuts shops; provided that, during the [two-year period] only, the provisions of this paragraph. . . shall not apply to another business located more than five (5) miles from this or any other Dunkin' Donuts shop"3 (covenant not to compete).
The defendant does not negotiate changes to the standard franchise agreement with any new (or existing) franchisees.
Although only franchisees are required to sign a covenant not to compete, all employees are bound by a Code of Ethics (code), requiring them to keep confidential information they learned while employed.4 There are a number of other documents by which the defendant informs a franchisee that the franchisee will become privy to information that must be held in confidence. They include the uniform franchise offering circular (sent to prospective franchisees), the franchise agreement itself, the development program deposit agreement (signed when a franchisee wants to reserve a certain territory for expansion of franchises), and a cover letter that accompanies certain operating manuals. When a franchisee sells a store, the franchisee is required to acknowledge possession of confidential and proprietary information that the franchisee is willing to sell to the purchaser. The plaintiff signed a number of documents by which he acknowledged the proprietary and confidential nature of the information he was acquiring. The plaintiff purchased two other Dunkin' Donuts franchises in March, 1999, and October, 2000, signing franchise agreements containing covenants similar to the covenants he executed in 1996. He was represented by counsel when he signed each of the franchise agreements containing the relevant covenants. In February, 2002, the plaintiff sold his three franchises to a third party.5 In July, 2002, the plaintiff moved to New Hampshire.
Shortly thereafter, before the covenant not to compete6 expired, the plaintiff contacted the corporate offices of Honey Dew Donuts and had an opportunity either to be an employee of Honey Dew or to own a franchise. However, when it learned of the plaintiff's covenant with the defendant, Honey Dew Donuts declined to talk to him further. The defendant refused the plaintiff's request to waive the covenant not to compete, and the plaintiff sued.
The plaintiff sought a declaratory judgment (G. L. c. 231A, § 1) that the covenant not to compete was unenforceable regarding both the plaintiff's employment by, and his opening of, a competing business in Massachusetts and New Hampshire. He asked for damages pursuant to G. L. c. 93A, § 11, claiming that the defendant wilfully and knowingly engaged in an unfair trade practice and unfair method of competition. He also claimed that the covenant was unfair under common law. The Superior Court judge issued his order for judgment in June, 2003. The covenant is no longer in effect, having expired in February, 2004.
Discussion.7 We affirm a judge's findings of fact and legal conclusions unless they are clearly erroneous or tainted by error of law. New England Canteen Serv., Inc. v. Ashley, 372 Mass. 671, 674 (1977).
1. Covenants not to compete.8 A covenant not to compete is enforceable only if it is necessary to protect a legitimate business interest, reasonably limited in time and space, and consonant with the public interest. See Marine Contrs. Co. v. Hurley, 365 Mass. 280, 287-288, 289 (1974); All Stainless, Inc. v. Colby, 364 Mass. 773, 778 (1974). Covenants not to compete are valid if they are reasonable in light of the facts in each case. See Marine Contrs. Co. v. Hurley, supra at 287; Saltman v. Smith, 313 Mass. 135, 145 (1943). Historically, covenants not to compete typically have arisen in either the employment context or in the context of the sale of a business. See, e.g., Whitinsville Plaza, Inc. v. Kotseas, 378 Mass. 85 (1979) (sale of business); Marine Contrs. Co. v. Hurley, supra (employment); All Stainless, Inc. v. Colby, supra (employment); Alexander & Alexander, Inc. v. Danahy, 21 Mass. App. Ct. 488 (1986) (sale of business). In the context of the sale of a business, courts look "less critically" at covenants not to compete because they do not implicate an individual's right to employment to the same degree as in the employment context. See Alexander & Alexander, Inc. v. Danahy, supra at 498, citing Whitinsville Plaza, Inc. v. Kotseas, supra at 102-103, and Wells v. Wells, 9 Mass. App. Ct. 321, 323-325 (1980). Moreover, in the context of the sale of a business, courts are less concerned with unequal bargaining power between the parties. Wells v. Wells, supra at 324. Rather, courts consider whether "the parties entered into the agreement with the assistance of counsel and without compulsion (an element frequently not present in the employer-employee context)." Wells v. Wells, supra at 324-325, and cases cited. Courts in other jurisdictions have concluded that a covenant not to compete in a franchise agreement does not fit neatly into existing standards for reviewing such covenants. See, e.g., In re KBAR, Inc., 96 B.R. 158, 159-160 (Bankr. C.D. Ill. 1988), and cases and authorities cited. However, many courts analogize such covenants either to employment covenants or sale of business covenants. For cases that have used the sale of business analogy, see, e.g., Wilkinson v. Manpower, Inc., 531 F.2d 712 (5th Cir. 1976); Jiffy Lube Int'l, Inc. v. Weiss Bros., 834 F. Supp. 683 (D.N.J. 1993). For cases that have used the employment analogy, see, e.g., Novus Franchising, Inc. v. Taylor, 795 F. Supp. 122 (M.D. Pa. 1992); O.V. Mktg. Assocs., Inc. v. Carter, 766 F. Supp. 960 (D. Kan. 1991); South Bend Consumers Club, Inc. v. United Consumers Club, Inc., 572 F. Supp. 209 (N.D. Ind. 1983), appeal dismissed, 742 F.2d 392 (7th Cir. 1984).
We conclude that, in light of the facts in this case, the covenant in the franchise agreement is more akin to a sale of business covenant. The plaintiff was not the defendant's employee. The franchise agreement itself specified that the plaintiff, as a franchisee, was an independent contractor. The defendant maintained an advisory relationship with the plaintiff. See generally DAR & Assocs., Inc. v. Uniforce Servs., Inc., 37 F. Supp. 2d 192, 197 (E.D.N.Y. 1999) (license agreement); Sentilles v. Kwik-Kopy, Corp., 652 So. 2d 79, 82-83 (La. Ct. App. 1995) (). The plaintiff had to pay to obtain his franchise. Moreover, as the trial judge found, the plaintiff entered...
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