Article Franchise+: “The importance of know-how in the context of a non-compete and non-solicitation clause” – mr. K. Bastiaans – dated March 10, 2021

In its judgment of 24 February 2010, the provisional relief judge of the District Court of Overijssel has commented further on the issue of know-how within the formula versus compliance with the non-compete and non-solicitation clause after the franchise relationship has ended.

Facts

The franchisor, a formula aimed at brokering the rental of real estate and the management of living space, has concluded a franchise agreement with the franchisee for a period of 5 years, starting November 1, 2014. The agreement was subsequently tacitly extended for another 5 years until November 1, 2024. In the franchise agreement, the parties have agreed on a non-compete clause, a non-solicitation clause and a penalty clause. Prior to concluding the franchise agreement, the franchisee has been working in the brokerage industry for 11 years and has followed the training of Assistant Broker.

In the second period of the franchise relationship, the parties discussed the (dis)functioning of the franchisee on several occasions. Ultimately, the franchisor terminated the franchise agreement. The reason for the cancellation is twofold: (i) the franchisee would not operate its establishment in accordance with the system or manual and (ii) the franchisee would have achieved 90% or less turnover in two consecutive years than the agreed turnover.

After the end of the franchise relationship, the franchisee has continued independently and operates a business as an independent broker in the district where it was active as a franchisee.

In the present proceedings, the franchisor claims, in short, compliance with the non-competition and non-solicitation clause.

The assessment

Before substantively discussing the issue, the preliminary relief judge will discuss Section 3:303 of the Dutch Civil Code in more detail; no one is entitled to a legal claim without sufficient interest, which means that the plaintiff, in this case the franchisor, must investigate whether it has sufficient interest to take a party to court. If this interest is lacking, this will result in inadmissibility for the claimant.

The preliminary relief judge considered that a non-compete clause and a non-solicitation clause in a franchise agreement are primarily intended to enable the franchisor to transfer its know-how to the franchisee and to provide it with the necessary assistance in applying its methods, without the risk of that such know-how and assistance will benefit competitors, albeit indirectly. The preliminary relief judge sees reason to do so because the non-competition clause in the franchise agreement also explicitly mentions ‘to protect the know-how transferred from the franchisor to the franchisee (…)’.

As a result, in summary proceedings the question must be answered whether there has been a transfer of know-how to the franchisee. If this is not the case, the franchisor has no legal interest to be respected in the compliance with the non-competition and non-solicitation clause, in the opinion of the preliminary relief judge, which will lead to inadmissibility.

Question 1: what is meant by know-how?

In doing so, the preliminary relief judge seeks alignment with the Franchise Act. In short, in order to be able to speak of an interest to be respected in law in protecting the know-how transferred by the franchisor, there must be knowledge or information that (i) secret, (ii) materially and (iii) has been identified, pursuant to Article 7:911 paragraph 2, under a, under 2 of the Dutch Civil Code.

Question 2: Has the franchisor transferred know-how?

The franchisor has indicated that the alleged transfer of knowledge primarily consists of a starter package; a compilation of information compiled by the franchisor, intended to unburden the franchisee with regard to day-to-day business operations. This concerns knowledge and information that has been collected by the franchisor after a certain effort and has been bundled, so that it no longer needs to be collected by the franchisee.

The franchisor also argues that a handbook has been made available to the franchisee which, in short, contains a description of the franchisor’s working method and formula, intended to make the individual franchisees successful in their business.

Subsequently, the franchisor argues that the knowledge referred to relates to general practice and also to further information about the brokerage industry. In the vision of the franchisor, the aforementioned knowledge is all intended to make the formula successful and to facilitate the franchisee where possible, to take work off your hands and to unburden you.

Finally, the franchisor states that so-called leads are used within the franchise company, which are unique and secret. The franchisor fears that this unique working method, which the franchisor says has been further developed, will be copied by the former franchisee for the purpose of operating its own brokerage firm.

The former franchisee, on the other hand, takes the position that no know-how has been transferred to it. Because of her employment history, she already had her own knowledge and work experience, which she also brought to the formula, in addition to her existing clientele.
In the view of the former franchisee, there was no training from the formula, and the remaining information only concerns general information that is not unique, secret or formula-specific. There are no secret leads, as they can also be obtained from other ICT professionals outside the franchise company, according to the former franchisee.

Judgement

In the opinion of the preliminary relief judge, the franchisor has not sufficiently demonstrated that there is a transfer of know-how, in the sense that it has not been sufficiently substantiated that the knowledge and information that has been transferred meets the criteria arising from the Franchise Act.

In the opinion of the preliminary relief judge, it has not been substantiated that the knowledge made available must be qualified as unique and/or secret information. It has also not been substantiated that this knowledge and information cannot easily be obtained without involving the franchisor.

The preliminary relief judge rules that it concerns information that is generally accessible to the public, or that it concerns knowledge that can be obtained easily. Nor has it appeared that the information should be qualified as essential for the franchise company.

In view of the foregoing, the preliminary relief judge is of the opinion that it has not been sufficiently substantiated that there is a transfer of know-how. For that reason alone, the franchisor’s claims must be declared inadmissible.

Needless to say, it is still considered that the franchisor has insufficiently substantiated that its interest in protecting that know-how should lead to an award of its claims. After all, the former franchisee is obliged to keep this knowledge confidential on the basis of the confidentiality clause. Without further substantiation, it cannot be assumed that it will cause a significant disadvantage to the franchisor through its possible own use of that technical knowledge. In this respect too, the franchisor has insufficiently substantiated its interest in compliance with the non-competition and non-solicitation clauses.

Conclusion

The preliminary relief judge clarifies the importance of properly defining know-how within the franchise formula, all the more so now that it is regularly ruled that compliance with a non-competition and relationship clause is only permitted insofar as this serves to protect the know-how of the formula. Know-how is defined as knowledge or information that (i) secret, (ii) materially and (iii) has been identified. Incidentally, these are criteria that are subject to strict requirements.

Incidentally, what is interesting in this judgment is that, with regard to the scope of the non-compete clause, the Court in preliminary relief proceedings links up with the know-how criteria and the explanation given by the Franchise Act. Apart from the fact that the concept of know-how is already referred to in the non-compete clause, the preliminary relief judge ignores the transitional period of the Franchise Act. The franchise agreement was concluded before the Franchise Act came into effect, which means that a transitional period applies until 1 January 2023 for existing franchise agreements with regard to, among other things, the non-compete clause. With regard to the scope of the non-compete clause, the preliminary relief judge, however, completely links up with the Franchise Act. Viewed in the light of the formulation of the non-compete clause, this is not surprising, but in our view it once again underlines how important it is to ensure that the franchise agreement complies with the Franchise Act.

The court also clarifies the importance of Article 3:303 of the Dutch Civil Code: no one is entitled to a legal claim without sufficient interest.