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Thursday, September 27, 2012

A Spouse and the Non-Competition Agreement


The enforceability of a non-competition agreement on a non-signing spouse has been the source of much litigation over the years. The courts are divided as to whether or not a non-signing spouse can be held to the terms of the non-competition agreement. A recent Wisconsin ruling has brought this issue to the forefront of business owner’s minds as they try to sort through what can and cannot be enforced.

In Everett v. Paul Davis Restoration, Inc., 2012 U.S. Dist. LEXIS 133682 (E.D. Wis. Sept. 18, 2012) the Wisconsin court held that the non-signing wife had not directly benefited from her husband’s franchise agreement and therefore could not be bound. The court wrote, “In order to hold Ms. Everett to a contract she did not sign, PDRI must show that she benefitted directly from the contract, not the business that the contract made profitable.” This case is particularly egregious to many in the franchise industry due to the fact that the signing husband “sold” the business to his wife. He stopped being a franchisee, but his wife took the concept and began operating a competing business.

However, several other courts have held exactly the opposite. Tennessee, Indiana and Massachusetts all have cases that hold in favor of the franchisor or the business being harmed by the violation of the non-competition agreement by the non-signing spouse. (See: Servpro Indus., Inc. v. Pizzillo, 2001 Tenn. App. LEXIS 87 (Tenn. Ct. App. Feb. 14, 2001); McCart v. H & R Block, 470 N.E.2d 756, 761 (Ind. Ct. App. 1984); Sulmonetti v. Hayes (1964), 347 Mass. 390, 198 N.E.2d 297).

If you are a business owner, how can you know if your non-competition agreement will be upheld against a non-signing spouse? Ultimately, the courts finding a violation of the agreement against a non-signing spouse examine the issue on three levels.

First, did the spouse benefit from the agreement at the heart of the non-competition agreement? If a spouse worked in the business (franchise or otherwise) then there is a more likely argument that the spouse received an actual benefit from the agreement.

Second, is the non-signing spouse acting as the alter-ego of the signing spouse. Similar to a corporate veil argument, many courts will look at who is actually running the business and how much information from the prior business is being used to make the current business successful. One Illinois court put it this way, “there must be evidence that she aided or operated in concert with the covenantor to breach the covenant or that she was the alter ego of the covenantor.” Norlund v. Faust, 675 N.E.2d 1142, 1157 (Ind. Ct. App. 1997).

Third, how much confidential information did the non-signing spouse have access to? This is difficult to prove, but the greater the access to confidential information, the more likely the non-compete will be enforced.

The safest way to move forward if you are worried that a spouse might try and circumvent the purposes of the non-competition agreement, is to have every spouse sign an agreement. This presents problems in and of itself, but it does give the protection that many courts fail to provide to franchisors and other business owners.