861 N.W.2d 437
Neb.2015Background
- Jani-King (Unlimited Opportunity, Inc.) granted Waadah a franchise for Omaha; the franchise agreement included a noncompete clause restricting post-termination competition for two years in the territory and for one year in any other territory where Jani‑King operated.
- After termination, Waadah formed a competing business (Legbo) and secured several former Jani‑King accounts; Jani‑King sued for breach of the noncompete and related tort claims.
- The district court held the noncompete unreasonable because the 1‑year restriction applied to "any territory in which a Jani‑King franchise operates," a global scope, and declined to sever that provision from the 2‑year restriction.
- The district court dismissed the breach and tortious interference claims as the covenant was unenforceable; Jani‑King appealed, asking this court to permit reformation/severability (the blue‑pencil rule) and to reconsider reasonableness.
- The Nebraska Supreme Court reaffirmed prior precedent rejecting judicial reformation/severability of noncompete covenants in franchise agreements and affirmed the judgment that the integrated covenant was unenforceable due to unreasonable geographic scope.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether courts may reform or sever unreasonable parts of an integrated noncompete in a franchise agreement (blue‑pencil rule) | Jani‑King: Nebraska should allow reformation/severability and permit tailoring covenants to reasonable scope/duration, citing public policy and the Franchise Practices Act | Waadah: Court should adhere to existing Nebraska precedent rejecting reformation; covenant must be enforced as written or not at all | Court held reformation/severability is disallowed; reaffirmed precedent refusing to apply the blue‑pencil rule |
| Whether the 1‑year, worldwide (wherever Jani‑King operates) restraint was reasonable in geographic scope | Jani‑King: The 1‑year restriction need not be invalidated; district court wrongly focused on it or its mootness | Waadah: The 1‑year clause is effectively without territorial limit and thus unreasonable | Court held the 1‑year restraint unreasonable because it lacked a proper territorial limit (practically global), rendering the integrated covenant unenforceable |
| Whether the covenant should be characterized and judged under sale‑of‑goodwill or employment standards | Jani‑King: Franchise context supports sale/goodwill characterization and enforceability under that standard | Waadah: Characterization subject to analysis but enforceability still requires reasonable time/territory | Court treated franchise covenant as analogous to sale of goodwill and applied reasonableness in time and space standard |
| Whether breach of contract and tortious interference claims survive if the covenant is unenforceable | Jani‑King: Claims should survive or covenant should be reformed; tortious interference still viable | Waadah: If covenant unenforceable, claims fail and competitors have privileged conduct | Court held covenant unenforceable; affirmed dismissal of breach and tortious interference claims |
Key Cases Cited
- H & R Block Tax Servs. v. Circle A Enters., 269 Neb. 411 (affirming that separate paragraphs of a covenant not to compete are not severable)
- CAE Vanguard, Inc. v. Newman, 246 Neb. 334 (rejecting court reformation of noncompete covenants)
- Swingle & Co. v. Reynolds, 140 Neb. 693 (discussing sale of goodwill and noncompete enforcement)
- Presto‑X‑Company v. Beller, 253 Neb. 55 (addressing reasonableness of ancillary noncompete restraints)
- Budget Rent‑A‑Car Corp. of Am. v. Fein, 342 F.2d 509 (example of an unreasonable territorial restraint)