Franchisors – Are your Non-Solicitation Agreements Enforceable?

Franchisors – Are your Non-Solicitation Agreements Enforceable?
February 12, 2018 by Christina Laun Fugate, Partner | Demetrice Allen, Associate
In late January, a class action was filed against Jimmy John’s in the Southern District of Illinois by current and former franchisee employees who are challenging Jimmy John’s enforcement of non-solicitation agreements. These agreements prohibit franchisees from recruiting or poaching employees from other Jimmy John’s restaurants. If poaching or recruiting does occur, Jimmy John’s has the right to terminate the franchise agreement and issue a $50,000 penalty. The plaintiffs are arguing that 98 percent of Jimmy John’s are franchises, and therefore, these agreements give employees little opportunity for competitive wages. Although this class action is pending in Illinois, this case begs the question whether a non-solicitation agreement, such as the Jimmy John’s agreement, is enforceable in Indiana.  
 
Non-solicitation agreements are usually found in employment contexts—they restrict the ability to solicit workers from former employment. A typical non-solicitation agreement prohibits a former employee from soliciting, inducing, or attempting to solicit or induce an employee to quit for a period of time.
 
Non-solicitation agreements are typically paired with non-compete agreements. Non-compete agreements limit the scope and geographical region an employee may work. For example, a non-compete agreement may restrict a baker from working in another bakery within a certain radius of his or her former place of employment for a defined time period. While enforceable, non-compete agreements are disfavored by Indiana courts as they restrain free trade. Indiana courts will only enforce a non-compete agreement if it is necessary to protect the interests of the employer and is reasonable. In the franchise context, the Indiana legislature has made it unlawful for a franchisor to require a franchisee to sign a non-compete agreement longer than three years or in an area greater than the exclusive area granted by the franchise agreement. If no exclusive area is specified in the franchise agreement, the area must be reasonable. Indiana state or federal courts have not addressed the enforceability of a non-solicitation agreement in the franchise context; however, courts in Indiana would likely apply the same reasonableness analysis. 
 
Jimmy John’s faces an interesting litigation. While this class action is pending in Illinois, its result could implicate the way in which franchisors structure their covenants in franchise agreements. We will continue to monitor. 

For more information, contact Christina Fugate, Demetrice Allen or another member of our Franchise and Distribution Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.



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