Bound by non-compete clause after expiration of the

MSJ Steenhuis – Franchise lawyer

The vast majority of franchise agreements contain a so-called post-contractual non-compete clause (hereinafter referred to as “non-competition clause” for brevity). The purport of such a non-compete clause is often that the franchisee is not allowed to operate a similar company in the same industry in his district or the location from which he operated his business for one year after the end of the franchise agreement. to exploit. Such a non-compete clause is in principle regarded as restrictive of competition.

Admissibility of a non-compete clause However, under the Block Exemption Regulation for vertical agreements, which came into force on 1 June 2000, it is permitted to include a post-contractual non-compete clause if it is limited to the place of establishment, also referred to as the locality. 

Article 5, preamble and sub b of the Block Exemption Regulation provides the following:

“The exemption provided for in Article 2 shall not apply to any of the following obligations contained in vertical agreements: 

b) any direct or indirect obligation of the buyer, after the end of the contract, not to produce, buy, sell or re-sell any goods or services, unless such obligation: – relates to goods or services supplied with the contract goods or services compete, and – is limited to the localities and lands where the buyer was operating during the contract period, and – is indispensable to protect know-how transferred from the supplier to the buyer, – and such non-compete obligation no longer applies than one year after the end of the agreement; this obligation is without prejudice to the possibility of imposing a prohibition, not limited in time, on the use and disclosure of know-how which does not belong to the public domain;” 

Purpose of the non-compete clause As appears from Article 5 of the Block Exemption Regulation just quoted, a non-compete clause is permissible if it protects the know-how of the franchisor. The Block Exemption Regulation defines know-how as: 

“A body of unpatented practical information, resulting from the experience of the supplier and the tests performed by him, which is secret, material and identified; in this context, “secret” means that its components are not generally known or readily available “substantial” means that the know-how includes information that is indispensable to the buyer for the use, sale or resale of the contract goods or services; “identified” means the know-how is so fully described that it can be verified whether it meets the criteria of secrecy and essentiality;” 

It is therefore very important for a franchisor to ensure a proper recording/description of what his franchise formula entails, as this will also be used to determine whether or not a non-competition clause is permissible. After all, if there is no interest to be protected, read: “know-how”, then no exemption can be obtained for the non-compete clause on the basis of the provisions of the Block Exemption Regulation.

Exclusive Territory As indicated above, a non-compete clause is permissible under the Block Exemption Regulation if it relates to the place of business / location from which the franchisee operates its franchise business. Does this automatically mean that a non-compete clause covering the entire exclusive area is impermissible? 

Although such a non-compete clause is not in accordance with the Block Exemption Regulation, it is not necessarily impermissible. This is partly related to the noticeability requirement. In short, the appreciability requirement means that the anti-competitive agreements on the relevant market are noticeable to competitors. If a franchise chain has a market share of less than 15%, there is in principle no question of brandability. This is based on the so-called De Minimis (minimis) regulation of the European Commission. However, this is not the only criterion. It is beyond the scope of this article to discuss this in more detail.

Therefore, if there is a market share of no more than 15%, a non-compete clause for an exclusive area is in principle permitted and in that sense not subject to restrictions. It should be noted, however, that the (minor) regulation referred to is not law, but should be seen as a point of reference for the explanation of the concept of “noticeability”. 

It is emphasized here that in principle it is impossible to give complete certainty about this. After all, the existing regulations, such as the Block Exemption Regulation, have not been issued for nothing. In general terms, it is therefore recommended, in order to ensure that a non-compete clause is enforced in court, to draw up a non-compete clause in accordance with the Block Exemption Regulation, whereby both the duration of the non-competition clause, i.e. one year , as well as the scope, namely the locality, is taken into account. However, a franchisee should take into account that he may still be bound by a non-compete clause that does not meet the conditions of the Block Exemption Regulation. 

Ludwig & Van Dam franchise attorneys, franchise legal advice