In an interesting case for parties seeking to impose a geographic boundary on competitive operations, an Ontario Court has held that a franchisor was not entitled to enforce a restrictive covenant because it did not have a legitimate interest to protect within the geographic area prescribed in the covenant.

In MEDIchair LP v DME Medequip Inc. (2016), the Ontario Superior Court of Justice held that MEDIchair LP (“MEDIchair”), the franchisor, could not enforce a restrictive covenant against Medequip Inc. (“Medequip”), the franchisee. MEDIchair operated a franchise network that sold home medical equipment.

DME had owned and operated a MEDIchair franchisee located in Peterborough, Ontario for approximately 20 years. MEDIchair’s franchise agreement with DME contained a restrictive covenant which prevented DME from engaging in “any business similar to the business carried on by MEDIchair or any of its authorized franchisees” for 18 months, within 30 miles of DME’s store or any other franchisee.

In 2008, 2169252 Ontario Inc. (“216”) purchased the DME franchise and agreed to comply with the restrictive covenant.

In 2015, the original franchise agreement between MEDIchair and DME expired and DME began operating an identical business under a new name.

MEDIchair sought to enforce the restrictive covenant against DME. The court held that while the covenant was not ambiguous or unreasonably broad, it was not enforceable because MEDIchair did not have a legitimate or proprietary interest to protect within the territorial scope of the covenant since it did not plan to locate a new franchise in the area prescribed in the covenant.

Takeaway:

For a franchisor to enforce a restrictive covenant, it must have a legitimate interest to protect within the territorial scope of the covenant.