Court Enforces Covenant Not to Compete Against Former Franchisee of Pizza Restaurant – Singas Famous Pizza Brands v. New York Advertising

A former franchisee of a regional pizza restaurant chain were barred from operating pizza restaurants within certain geographic areas, according to the Second Circuit Court of Appeals in New York City. In Singas Famous Pizza Brands Corp., et al v. New York Advertising, the plaintiffs sought to enjoin the defendant from opening two new pizza restaurants shortly after the termination of the defendant’s franchise agreement with the plaintiffs. The franchise agreement included a covenant not to compete, stating that the franchisee could not operate similar pizza restaurants within a specified geographic area. The defendant challenged the enforceability of the geographic restriction. The district court ruled for the plaintiffs, and the appeals court affirmed the ruling.

The plaintiffs, Singas Famous Pizza Brand Corp. and Singas Famous Pizza & Restaurant Corp., collectively referred to as “Singas,” operate or franchise multiple pizza restaurants in the New York City metropolitan area. Each restaurant uses Singas’ unique branding and menu. The defendants operated two pizza restaurants, a former Singas franchise in the East Village, Manhattan, and a new restaurant in Jackson Heights, Queens. Singas obtained a preliminary injunction that barred the defendant from operating both restaurants. The defendant appealed only as to the Jackson Heights restaurant, arguing that the ten-mile geographic restriction was unduly broad.

In reviewing the preliminary injunction, the Court of Appeals used an abuse of discretion standard, meaning that it could review whether the trial court view of the law or assessment of the evidence was incorrect, or whether its ultimate decision deviated from the set of allowable rulings. A preliminary injunction requires proof that nothing short of injunctive relief can prevent “irreparable harm” to the plaintiff, that the plaintiff has a good chance of succeeding on the merits at trial, and that an injunction serves the public’s interest. A restrictive covenant, such as a covenant not to compete, is only enforceable if its limits on the length and geographic reach of its restrictions are reasonable and not “oppressive.” The court concluded that the covenant not to compete was both reasonable and not oppressive, and that the injunction against the Jackson Heights restaurant should be upheld.

The Court of Appeals recited several facts from the record in its opinion. It noted that, in the area within ten miles of the defendant’s East Village location, Singas had nine restaurants. Several of those Singas restaurants were also located close to the Jackson Heights restaurant. Singas’ “flagship” restaurant, a description used by both parties, was less than one mile from the Jackson Heights location. The court noted that the defendant agreed that its menu at the Jackson Heights location was “virtually identical” to Singas’ menu. The defendant reportedly also used some of Singas’ “distinctive practices” in its kitchen, and it retained many of the employees who worked for the East Village Singas franchise. It also retained much of the equipment from that restaurant. Singas, as franchisor, had a legitimate interest in protecting its brand and preserving the goodwill of its customers. The defendant’s operation of a significantly similar restaurant so close to several of Singas’ restaurants posed a clear risk of confusing customers and damaging the Singas brand.

At Lubin Austermuehle, our franchise litigation attorneys represent business owners and professionals in this and other claims throughout the Chicagoland area including Cook, DuPage, Lake, Kane, McHenry and Will Counties and in the Mid-West region including Indiana, Wisconsin and Iowa.