Article Franchise+: “Only with proof of transferred know-how can a non-compete appeal be invoked” – mr. T. Meijer – dated July 26, 2021

On July 16, 2021, the preliminary relief judge of the Central Netherlands District Court, location Utrecht, rendered a judgment in a dispute between a franchisor and its (former) franchisee about a post-contractual non-competition prohibition. In its judgment, the judge in preliminary relief proceedings sought to link up with provisions of the Franchise Act, even though this act was not de facto applicable to this issue.

The (former) franchisee has been working as an independent butcher for many years. In 2009 he joined the franchisor formula. Due to a difference of opinion, the cooperation between the parties was eventually terminated by the former franchisee. He subsequently continued to work at the location as a butcher and operated his shop under his own name. The franchisor wanted to invoke the non-competition clause included in the franchise agreement and has initiated summary proceedings to this end, in which compliance with the post-contractual non-compete provision and payment of allegedly forfeited fines as a result of the alleged violation were demanded. The franchisee has defended these claims. For example, the franchisee has argued that the franchisor cannot invoke the prohibition of competition because no know-how has been transferred to him. He stated that he acquired his knowledge of the butcher trade himself and did not receive any knowledge and/or information from the franchisor that meets the definition of know-how. He bought, financed and furnished the establishment himself. He also never received a handbook. In fact, he was only able to use the trade name of the formula.

The preliminary relief judge has ruled that it is settled case law that a non-compete clause in a franchise agreement is primarily intended to enable the franchisor to transfer its know-how to the franchisee without running the risk that this know-how will benefit competitors . To this end, the preliminary relief judge literally stated: “This means that if there is no demonstrably transferred know-how by the franchisor, this franchisor cannot invoke the post-contractual non-compete clause.” This has indeed been established earlier by other courts [1] . The District Court of Overijssel has even ruled that without transferred know-how, a franchisor has no interest in invoking a prohibition on competition and should therefore be declared inadmissible if it institutes legal proceedings based on such an appeal [2] . Although perhaps legally clearer, the preliminary relief judge in Utrecht did not want to go that far, but it did reject the franchisor’s claims.

In determining what qualifies as know-how, the preliminary relief judge used the definition as included in the Franchise Act. The Franchise Act did not apply to the matter because of the two-year transitional period provided for in the Act. However, the preliminary relief judge has ruled that this definition is a codification of the generally accepted and customary description of know-how in practice, so that it is of the opinion that it can also use it in this matter. In short, the preliminary relief judge ruled that in order to speak of know-how, there must be knowledge or information that is secret, essential and identified.

Set against these high standards, the preliminary relief judge concludes that the franchisor, in view of the franchisee’s extensive and well-founded dispute, has not made plausible, let alone proven, that know-how has been transferred in this matter. For that reason, the Court in preliminary relief proceedings rejected the franchisor’s claims and ordered it to pay the costs of the proceedings.

The answer to the question of whether a post-contractual non-competition prohibition can be invoked therefore requires a lot of precision. There must be an increasing awareness within a franchise formula of whether know-how is being transferred and, if so, which knowledge and information falls under the strict definition. This importance will only increase with the Franchise Act now that a specific and far-reaching article has been included in the Franchise Act, on the basis of which a prohibition of competition is only permitted if it is indispensable for the franchisor to protect the know-how it transfers to its franchisees.

[1] District Court of Gelderland 16-02-2021 ECLI:NL:RBGEL:2021:1875, District Court of Overijssel 21-09-2016 ECLI:NL:RBOVE:2016:3742, RB Overijssel 22-06-2016 ECLI:NL:RBOVE: 2914.

[2] Court of Overijssel 24-02-2021 ECLI:NL:RBOVE:2021:877