Use It Or Lose It: Restrictive Covenants In Franchise Agreements

A recent case from the Ontario Court of Appeal suggests franchisors may lose the protection of a restrictive covenant in a franchise agreement if, at the time the franchisor wants to enforce the covenant, it can't establish a "legitimate or proprietary interest to protect" within the territorial scope of the covenant.

In MEDIchair LP v. DME Medequip Inc., 2016 ONCA 168, the Ontario Court of Appeal refused to enforce a restrictive covenant against a former franchisee, where the franchisor had no intention of operating or granting any further franchises in the territory.

In that case, the respondent franchisor, MEDIchair LP, operates a network of franchise stores that sell and lease home medical equipment. In 2008, the appellants purchased a MEDIchair franchise operating in Peterborough, DME Medequip Inc., and agreed to assume the obligations in a 2005 Franchise Agreement between MEDIchair and DME. The Franchise Agreement contained a restrictive covenant