A Nice Slap Down Against a Franchisor in California: A Judge Tells U-Haul to: “Haul” Your Non-Compete Clauses Out of Your Contracts

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Franchise Law Attorney

A California appellate court recently upheld a permanent injunction in Robinson v. U-Haul Company of California barring U-Haul from enforcing its non-compete covenants in California. U-Haul also was required to pay over $800,000 in attorney’s fees to its former dealer.

U-Haul sued one of its independent dealers for breach of contract and unfair competition after the dealer’s contract with U-Haul was terminated and the dealer began renting out Budget trucks at the former U-Haul dealerships. A California court determined that U-Haul’s non-competition covenant was illegal and that U-Haul knew this at the time it included it in its dealer contracts. U-Haul appealed.

The court listed four reasons in support of its decision. First, U-Haul had not taken action to bind itself legally to its stated policy. Second, U-Haul had an “ingrained, long-term, knowingly illegal corporate practice” that provided support for a finding of likely repetition in the future. Third, even when U-Haul revised its standard dealer contract in 2010, it “did not purge the offending covenant,” but instead inserted the words “void where prohibited” without demonstrating “across-the-board notification” to current dealers of its policy change. Fourth, U-Haul’s change in policy came only in response to the losses it incurred in litigation, and yet it continued to insist at trial that its non-competition covenant was valid and enforceable.

This decision demonstrates that some states, like California vigorously restrict non-compete provisions and the consequences for including them are high. Employing language like “void where prohibited” and claiming to have informed those subject to these provisions that they are unenforceable will receive a cold reception from franchisee friendly courts.

Unfortunately I cannot state with confidence that the outcome would be the same in New Jersey which is notoriously a franchisee unfriendly state.

To discuss your NJ Franchise matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.