How could the ruling negatively impact franchisors considering moving into Georgia?
This proposed constitutional amendment highlights the competing interests of a franchisee’s freedom to contract and a franchisor’s investment in its methods of training franchisees to operate the business. From a public policy standpoint, the current constitutional provision, and its interpretation by Georgia courts, discourages businesses from franchising in the state. It tells franchisors, especially those with knowledge-sensitive franchises, that when they operate and train franchisees in Georgia, the knowledge and skill they impart will not be protected. It also signals to franchisees that there is no intrinsic value in purchasing a franchise, as the franchisor’s efforts to protect its business model will not be enforced.
If this constitutional amendment is not passed, it will have a chilling effect on businesses deciding to franchise their operations in Georgia. Franchisors with Georgia operations will be forced to charge a high premium for unrestrained competition or they will choose to operate in other states.
Why would a franchisor shy away from Georgia if the courts can’t enforce non-compete covenants in franchising agreements?
A franchisor is selling a business model, and if someone can copy it without any concern about running afoul of any restrictive covenants of a franchise agreement, there’s no real assurance that the business model will be protected. That could have a significant impact on a business’s decision to come to Georgia. The ruling could also potentially expose existing franchisees in the state to unfair competition. A franchise contract is like the long-term lease of a business model, and if someone can take that model and open up a competing business, other franchisees will no longer see value in the franchise model. What is the incentive to operate a franchise in Georgia when someone can take everything you have and start their own business?
What action is the Georgia Legislature taking in light of the Georgia Supreme Court’s ruling?
It is considering a bill to amend the Georgia constitution. HR 178 proposes a constitutional amendment in which the General Assembly may authorize judicial enforcement of contracts that limit the competitive activities between or among employers and employees, distributors and manufacturers, lessors and lessees, partnerships and partners, franchisors and franchisees, sellers and purchasers of a business or commercial enterprise, or two or more employers. If passed, this bill will allow the courts to enforce franchise agreements that limit competitive activities. The resolution would allow the enforcement of contracts that restrict competition so long as the contract is reasonable in duration, geographic area and line of business. It would also allow the courts to ‘blue pencil’ or modify contracts to achieve the intent of the parties instead of throwing out the entire agreement based on one unenforceable covenant.
Ellen Taylor is an attorney at Baker, Donelson, Bearman, Caldwell & Berkowitz PC. Reach her at [email protected] or (404) 221-6507.