Time To NOT Make The Donuts

The Massachusetts Supreme Court reviewed for the first time in that jurisdiction whether covenants not to compete are enforceable in franchise contexts. The court held that such covenants are enforceable, and the court further held that they would be reviewed with the less critical treatment accorded to covenants not to compete stemming from sales of businesses.

In Boulanger v. Dunkin' Donuts Inc., 442 Mass. 635, 815 N.E.2d 572 (2004), the plaintiff owned three Dunkin' Donuts franchises in the Syracuse, New York, area. As part of his agreement with Dunkin' Donuts, Boulanger signed a convenant not to compete whose terms stated that he would 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…" The covenant would last two years beyond the termination of the franchise agreement, and would have a territorial limitation whereby it only applied within a five mile radius of any Dunkin' Donuts shop.

In February 2002, Boulanger sold his three franchises. He then moved to New Hampshire in July, 2002. At that time, Boulanger contacted Honey Dew Donuts for either an employment or franchise opportunity. When Honey Dew learned about Boulanger's covenant with Dunkin' Donuts, Honey Dew stopped dealing with him. Boulanger then sought a declaratory judgment that the covenant was unenforceable under G.L. c. 93A, § 11, as an unfair trade practice and an unfair method of competing.

The court held that covenants to not compete do apply to franchise agreements, and that the scrutiny it would use in examining the covenants would be that level given to sales of businesses. The court stated that these covenants are typically used in two contexts, employment and sales of businesses. Additionally, the court recognized that these contexts are treated differently: in regard to the sale of businesses, courts look at the covenants "less critically". The court offered two reasons for disparate treatment: (1) sales of businesses do not "implicate an individual's right to employment to the same degree," and (2) courts are less concerned with equal bargaining power between the parties.

The Massachusetts court held that in this case the covenant in a franchise agreement more closely resembled the sale of a business model, and the court cited nine facts in support of its conclusion:

1. The plaintiff was not the Dunkin' Donuts' employee.


2. The plaintiff was an independent contractor.


3. Dunkin' Donuts maintained an advisory relationship with the plaintiff.


4. The plaintiff had to pay to obtain the franchises.


5. The plaintiff was represented by counsel when he purchased the franchises.


6. The plaintiff received the right to make profits from the franchises.


7. The plaintiff received long-term contracts of association with Dunkin' Donuts.


8. The plaintiff benefited from protection from competition from Dunkin' Donuts.


9. The plaintiff netted $72,000 from the sale of his franchises.

Having determined that it would apply the standard of review used for covenants not to compete in the sale of a business context, the court ultimately held that this covenant was enforceable. Interestingly, a factor given great consideration by the court was that Boulanger should not be able to escape a covenant not to compete from which he benefited while he was an active franchisee.