Bankruptcy Court Rebuffs Debtor’s Attempt to Reject Non-Compete and Confidentiality Agreements

Chapter 11 bankruptcy debtors generally have wide latitude to reject executory contracts. However, it’s by no means an absolute right, as exemplified by a recent ruling in the proceedings of In re Empower Cent. Michigan, Inc., in the U.S. Bankruptcy Court for the Eastern District of Michigan.

Case Overview

The case involves a debtor-franchisee of an auto repair center in Fenton, Michigan, who sought to reject its franchise agreement, including an embedded non-compete agreement, as well as a separate confidentiality agreement (collectively, the “Agreements”). Initially, the debtor indicated its intention to assume its franchise agreement with franchisor Auto-Lab Franchising, LLC for the operation of an Auto-Lab Complete Car Care Center. However, the debtor later changed course, and took steps to rebrand from the same location, including repainting the facility, ceasing sales reports, and preparing to operate independently while still using the franchisor's trademarks and intellectual property.

The debtor, seeking to reject the Agreements under section 365 of the Bankruptcy Code, argued the Agreements provided no tangible benefit to it moving forward given the high monthly franchise fees it was obligated to pay to the franchisor.

As discussed below, while the bankruptcy court authorized the debtor to reject the franchise agreement, it did not allow the rejection of the embedded non-compete agreement, nor the separate confidentiality agreement, on the grounds that these agreements were not “executory contracts.”

Legal Analysis

The bankruptcy court’s decision hinged on two key legal concepts:

1. The definition of "executory contracts" under bankruptcy law

2. The nature of damages arising from breaches of different contractual provisions

The court relied on the U.S. Supreme Court's guidance in NLRB v. Bildisco & Bildisco, which defines an executory contract as one where performance remains due to some extent by both parties. Using this standard, the court determined that:

1. The franchise agreement was executory, as both parties had ongoing obligations.

2. The non-compete and confidentiality provisions (both within the franchise agreement and in the separate agreement) were not executory, as the franchisor had already fulfilled its primary obligation by providing proprietary information.

The court also analyzed what types of damages would arise from the debtor’s breach of the Agreements if it were to exercise its right to reject. The court concluded:

1. The franchise agreement contained a liquidated damages clause, allowing for monetary compensation in case of breach.

2. The non-compete and confidentiality provisions primarily provided for equitable remedies (like injunctions) that couldn't be easily reduced to monetary claims.

As the court explained, “a breach giving rise to money damages is a claim in [the] Debtor’s bankruptcy” under section 101(5)(A) of the Bankruptcy Code. However, “a breach giving rise to equitable relief (e.g. injunctive relief, specific performance, etc.) may or may not be a claim, depending on whether the right to equitable relief is ‘an alternative to payment or if compliance with the equitable order will itself require the payment of money.’”

Accordingly, because the equitable remedies contained in the non-compete and confidentiality provisions could not be reduced to a monetary claim, they remained enforceable by the franchisor.

In sum, the court ruled that the franchise agreement was an executory contract that could be rejected, but the non-compete and confidentiality agreements were not executory. Moreover, even if the non-compete and confidentiality agreements were executory, only equitable remedies—not a monetary claim—were available to the franchisor should they be breached.


The In re Empower Cent. Michigan, Inc. decision serves as an important reminder that non-compete and confidentiality agreements may not be easily discarded in bankruptcy proceedings. The devil is indeed in the details, as the court's ruling hinged on the specific language and structure of these agreements. It demonstrates that careful drafting of non-compete and confidentiality clauses—either as standalone agreements or as distinct provisions within larger contracts—can provide protection even in the face of a counterparty's bankruptcy. For debtors, this highlights that bankruptcy may not offer a clean slate from all contractual obligations, especially those designed to protect intellectual property and prevent unfair competition.