In our sixth installment of “Ask a Lawyer” we featured questions from Larry Donahue.
Read it here
QUESTION: When I graduated from college, I signed up with what is essentially a franchise. At the time it seemed like a great deal and several of my fellow students had signed up with them in the past and they seemed thrilled. The problem is I am no longer happy with the arrangement and I want to leave the franchise. I want to start my own practice. What I didn’t realize until recently is how limiting the non-compete is in my contract. It limits me from practicing within a 45-mile radius of other franchise locations. Since the franchise opens more locations all the time, there is basically no place I can practice in NM or the southwest for that matter- whether it be a large city or a small town. The other problem is I don’t see an expiration on that non-compete. Clearly, I had no idea what I was getting into when I signed up right out of school. Obviously, I should have had a lawyer look it over. I can’t change that now. All I want to know is how do I get out of or around this non-compete? It basically feels like corporate slavery if I have no choice as to where I can work.
ANSWER: I’m sorry to hear about this. I cannot tell you how many franchisees I know that are in similar circumstances. Franchisors love to make fantastic promises about growth and potential, but when you look at the fine print, what you’ll learn is they place all the risk on the franchisee – and make it very difficult and costly to fight. To all readers out there considering entering into a franchise, let this be a lesson for you: Do not enter into a franchise lightly, and please make sure you have an attorney you trust review the franchise agreement, answer your questions and explain what could go wrong. There are two main questions here. First, is a non-compete valid? Second, if it is valid, is it enforceable? The answer to both questions will depend on the “choice of law” provisions of your franchise agreement. Even though your franchise is located in New Mexico, it’s possible your franchise agreement would apply the law of a different state to your non-compete. If this is the case, and your franchise agreement is based on the law of a state other than New Mexico, you should consult with an attorney located in the state that applies. If we assume your franchise agreement relies on New Mexico law, then you need to know that non-compete agreements are enforceable in New Mexico if they are “reasonable”. There is no black-and-white test on what is or is not reasonable, but courts look for limitations in scope, typically in time and geography. Therefore, non-compete agreements that last “indefinitely” will almost certainly be viewed as unenforceable in New Mexico. Similarly, non-compete agreements that have no restrictions in geographic scope will also usually be viewed as unenforceable. The lack of an expiration on your non-compete can represent one of two issues, both that could be in your favor. First, if there’s no expiration language at all relating to the non-compete, it may represent faulty language that permits us to claim the non-compete terminates when the franchise agreement terminates. Otherwise, second, if the language in the non-compete says it never expires, then we could argue the noncompete is not reasonably construed and therefore unenforceable. There are several options available to you. First and foremost, try to negotiate with the franchisor. Some franchisors would rather negotiate than fight, and I’ve seen franchisors willing to make exceptions or redefine the non-compete restriction in a way that still protected the franchise, but provided an opportunity for the former franchisee to provide competitive services in the local community. If you are getting nowhere in negotiating with the franchisor, but you believe the non-compete is not “reasonable,” then instead of simply breaching the non-compete and possibly exposing yourself to a damages claim by the franchisor, you can instead sue the franchisor and seek what’s called “declaratory judgement”. This would ask the court to weigh in on the enforceability of the non-compete clause before you break it, therefore giving you a legal mechanism to determine whether it’s safe to ignore the noncompete. Finally, you brought up a new issue that is untested in New Mexico: Specifically, can a non-compete that may be considered “reasonable” on its face (assuming for the moment, reasonable expiration language), be rendered unreasonable by the business practices of the franchisor – because they are selling so many franchises, they effectively render the geographic scope unreasonable. Would it be considered unreasonable to be restricted from practicing in NM or the southwest for that matter? Possibly, especially if you were a medical or dental practice. If the franchisor is unwilling to negotiate with you, I would strongly recommend you consider a declaratory judgement action, if you feel you’re in such a circumstance.
QUESTION: I had my website built 7 years ago, and I paid an independent contractor to build my website. I don’t know where all the images came from, that I used to build my website, but I know I told my web developer to purchase images as needed to make sure we did things correctly. I know I spent several hundred dollars on images, but I couldn’t tell you to this day, where my images where purchased or what I spent for each image. Well, I received a demand letter from a law firm out of Canada, saying one of the images on my website was stolen, and they are demanding that I pay $15,000 for the use of that image. Is this for real? Can I ignore this letter, or can they come after me? I took down the image, so am I now okay?
ANSWER: I do not recommend you ignore any demand letter from any law firm. You should certainly hire a business or copyright lawyer to look at the letter, investigate, and advise you on next steps. If it is legitimate, such an attorney can often negotiate and get the dollar demand reduced – and make sure a proper settlement agreement is signed, so you can continue to use the image and most importantly, they cannot come after you again later. Do NOT simply send someone money in an attempt to settle. You want to make sure that (1) the copyright claim is valid, (2) the party claiming infringement really owns the copyright, and (3) a settlement agreement is put in place, so they cannot come back at you later. I’ve seen situations where a client attempted to settle, sending thousands of dollars to a copyright claimant, only to have later demands for more payment. Sending money in an attempt to settle doesn’t mean you’ve settled properly, unless you have an agreement saying so (with the right copyright owner). As it relates to copyright infringement claims, you need to treat them very seriously. Here’s why: images are protected by US Copyright Law, and US Copyright Law is one of the rare instances of “strict liability,” which means you can be liable for copyright infringement even if you had no intention of using someone’s copyrighted image. It’s like statutory rape – it doesn’t matter that you didn’t know the age of the minor or whether the minor even lied to you – you can be guilty of statutory rape simply for the act. It’s the same for copyright infringement. Even if someone lies to you, or you have a good-faith belief you properly purchased a license, or someone else obtained the image – if such a copyrighted image is being used by your business, your business then violates the copyright. Such a copyright violation – for images that are properly registered with the US Copyright Office – can be subject to statutory damages (up to $75,000 per infringing use), attorneys fees, actual damages, lost profits and more. It’s a very big penalty, and you definitely don’t want to have to defend against a copyright infringement action against you or your business. The strict liability nature of copyright infringement really causes problems for business owners. It’s important to understand that (1) just because someone tells you the images are okay, doesn’t mean you’re okay; (2) if images are available on Google or the Internet, doesn’t mean they are available for your use; and (3) even if images are available from a “royalty free image” website, they still may not be okay for your use (I’ve seen instances where someone has posted copyrighted images to a royalty-free website). What happens when you receive a letter from a law firm demanding that you pay some exorbitant amount for an image that would have otherwise cost you less than $100 to purchase? Typically, such law firms make a living out of suing such businesses (and the business owners personally). You run the risk of such a law firm suing you in some other state far away from your local community. If you defend yourself, you run the high risk of losing and having to pay all their costs and attorney’s fees, to boot. If you don’t defend yourself, you will certainly risk a “default judgement,” which means the court will decide against you and pretty much award the complaining party all the damages they were seeking (again, including their costs and attorney’s fees). Once they win the lawsuit against you, they will seek to domesticate the action in New Mexico, which will permit them to collect against you and negatively affect your credit. Therefore, you don’t want to ignore the demand letter and you want to do whatever you can to avoid the legal fight. What can you do to protect yourself from this happening to you? The best way to avoid this, is to hire a web developer you can hold accountable – someone who can be properly sued and has the resources / credit to be held accountable. This is NOT your nephew from high-school. This is NOT someone from guru.com living in India or Romania. This IS a reputable marketing or web-development firm, ideally in New Mexico (such as Boomtime. com orMaverickWebMarketing.com). Make sure the “services agreement” you sign with them includes an indemnity paragraph, where the company agrees to indemnify you and your company against any and all third-party actions related to copyright infringement. After all, you’re hiring them to build you a great website and they are supposed to be the experts. Ask them to obtain (and provide you with copies of) proper licenses for all copyrightable work, and copies of receipts and the licenses for your file, so you can refer back to them if you ever have a problem. If you already have a website, and you did hire your nephew or that web developer out of India or Romania, then I would strongly encourage you to consider redoing your website. Think about it this way: Would you rather pay my fees as a lawyer to fight a copyright claim plus whatever is needed to settle, or would you rather have a great, brand-new, modern-lookingwebsite?
Who is Larry Donahue?
Larry is a seasoned high-tech business executive and 20-year attorney, with a focus in contracts, negotiations, business transactions, intellectual property and Internet law. He has over 20 years of business development and IT consulting experience. His former clients (as a consultant) ranged from small startups to the Fortune 50, including GE Capital, Bank One, IBM and Amadeus.
Real Life Legal Horror Stories
Here's a short video of some real stories Larry has encountered in his years of practicing law and some solutions he could have provided.
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