Wednesday 12 October 2011

A No-Compete Agreement

In "Ninth Circuit Limits the Scope of In-Term Covenants Not to Compete," the Intellectual Property Blog tells how the comedy club Improv West made a contract with CCI that gave CCI exclusive use of the trademarked "Improv" name, but also prohibited CCI from opening comedy clubs under any other name:

Defendant Improv West ("Improv") is the founder and owner of the Improv Comedy Club trademark. It entered into an agreement with Comedy Club International ("CCI") providing that: 1) CCI had an exclusive right to use the "Improv" name to open comedy clubs in the United States, 2) CCI had to open four clubs a year for the first three years, and 3) CCI was prohibited from opening comedy clubs under any other name until the agreement expired in 2019.

CCI failed to open the requisite number of clubs. Improv immediately cancelled CCI's right to use the Improv name, began opening its own clubs, and sought to enforce the non-compete for the term of the agreement because CCI continued to run established Improv clubs.

The court ruled that the agreement did not violate anti-trust laws, because it didn't reduce the competitiveness of the comedy market substantially. The Court did say that it would enforce the no-compete agreement only in markets where new CCI clubs would directly hurt Improv profits, since California state law bans extreme no-compete contracts.

What the courts try to do in a case like this is to see whether the contract will end up destroying value (by reducing existing competition in the market) or increase it (by allowing two firms to help each other improve their product or reduce their costs.

California law, however, says the state will not enforce agreements not to compete that block competition in a substantial section of the market, so the Court ruled that CCI was only blocked from opening new clubs in counties where it already was operating an Improv club.

15 comments:

  1. Collusion is presesnt between the two comedy clubs because the firms were agreeing on specific number of outputs for CCI. The contract also implies exclusive dealing because by limiting the number of clubs unitl 2019, it lessens competition in California.

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  2. The fact that CCI didn't abide by the contract stating that they had to open four clubs a year presents a problem with the competition. Collusion was definitely involved because the firms came to an agreement on the number of clubs for CCI.

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  3. The Court should rule that in areas where competition will be significantly affected the agreement made is void. The agreement CCI and Improv made is similar to how a franchise works, but both parties have the ability to open new clubs. Improv has the right to open new clubs, but it should be careful in how it crafts its contracts (especially in a state with laws like California).

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  4. This is an example of collusion, but a legal one that as Sumner pointed out is quite close to franchising. Although the contract controls competition, the court did rule that the affect on competition would not be great enough to violate antitrust laws. In the end, the ruling worked in Improv’s favor but only to some extent as the state of California ensured that it maintained its stance on extreme anti competitive contracts.

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  5. Collusion is written all over this. And it seems interesting that at first thought, by trademarking the word "improve" it seems that there would be an immediate reduction in competition in the comedy market. Intellectual property is incredibly valuable when used in the proper manner. CCI missed out by not meeting the covenants.

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  6. While I understand the idea for these types of entertainment clubs to attempt to control the market, it just seems a bit unncessary to use such collusive tactics to corner the market. As the agreement ended up backfiring with CCI's failure to meet their predetirmined quota of yearly club openings, it's not suprising the California courts found the contract to posess an extreme anti-compete clause.

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  7. Firms are always trying to gain market power, so whenever they see an opportunity to gain power, they will. In this case they saw the oppurtunity in collusion. I would think that no regulation would be able to stop firms for grabbing for market power in a questionable manner; they will always find a shortcut somewhere.

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  8. I believe this agreement is reasonable in its own right because one cannot sell a trademark to somebody and still use the trademark to compete with the buyer.In this case however, the contract seemed to be biased against CCI because on condition that it fails to meet the quota requirement,it not only looses the right but also cannot compete with Improv West. I do think this scenario is illegal since it will reduce competition. I'm actually wondering if Improv West has plotted against CCI all along.

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  9. It's a tough situation to judge, because CCI did enter into this contract with Improv and I feel they should make amends for not delivering on what they promised to do. At the same time, not having CCI around to provide a healthy dose of competition until 2019 in ALL of the U.S. is just too extreme. I think the edited covenant does a good job in protecting the rights of Improv by punishing CCI without forsaking the public interest by ensuring that competition is still possible.

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  10. I see the so-called agreement more like a trap set by Improv. Without further information, I can't assure the purpose of requiring CCI to open a certain number of clubs for 3 years is to collude. But the punishment of failure is too unreasonable that it will drive CCI out of business until 2019. It would reduce competition greatly and is much more than a franchise agreement could enforce. So the court's judgement is fair that CCI can continue its business but can't compete in places where Improv already exists. We are also alarmed that broad and sweeping language should be avoided in in-term covenants.

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  11. I feel like if two parties are entering into an agreement then they should be held accountable to that document. In this case it seems to me like CCI is getting away with too much. I understand you can enter into an unfair agreement, but if you agree to it you made a conscious decision to abide by those rules. It seems like CCI is getting the better end of this bargain.

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  12. I agree that there is definitely collusion present, and that should be illegal, but the conclusion that the clubs will not hurt competition changes how harsh the punishment should be, or if there should be one at all.

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  13. The range of a comedy club is certainly pretty limited. People are only willing to drive so far to see a show. Therefore, it seems that collusion, and thus a reduction in surplus, would only occur if CCI and Improv opened clubs in the same geographic region.

    This being said, the courts must uphold the laws for whichever jurisdiction they represent. In this case California seems to be fairly clear on their stance when it comes to no compete contracts, and the court simply followed the law already in place.

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  14. Good comments. As you can see, enforcing the no-compete contract involved a lot of different issues, ranging from whether punitive contracts should be enforced as written to whether competition would be increased or decreased by allowing such clauses.

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  15. Maximilian Roedder2 November 2011 at 13:03

    In my opinion, the most important aspect when discussing whether or not to enforce the no-compete agreement is the effect on consumer surplus. Since competition usually helps increase consumer surplus, the ruling of the California Court appears to be in the consumers' best interest while still protecting a the current Improv profits. Therefore, this seems to be a very balanced and reasonable judgement.

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