Consequences of terminating a franchise agreement: a remarkable weighing of interests

At the end of 2013, there was a remarkable ruling by the Court of Arnhem in this case. Although the franchise relationship between the franchisor and franchisee in question had formally ended, it was determined in preliminary relief proceedings that the franchisee could continue to use the name and trade name of the franchisor for a certain period. The interests of the franchisee in question were so important that this ruling was reached.

In itself, the factual situation that led to this statement is somewhat peculiar. This is about a formula  with about 230 stores. The franchisee in question operated 73 of these stores, in addition to which 25 other franchisees were active. The franchise agreement between the (major) franchisee and the franchisor was terminated in mid-2013, after which the franchisee continued to use the formula’s trade name and brand, under protest from the franchisor. The franchisee argued this by using the name, stating, among other things, that he already used that name before it came to a franchise relationship. The parties had a long history with each other. In the franchisee’s view, the fact that the initiative to terminate the relationship came from the franchisor also played a role. The franchisor subsequently brought the franchisee into interlocutory proceedings with, in short, the claim to cease using the trade name and the trademark.

The court was the first to establish that the franchisee was not the owner of the trademark and trade name. The franchisor was therefore right in this respect. In its further assessment, however, the court took into account that the termination of the franchise agreement was partly caused by a far-reaching reorganization at the franchisor. The franchisee was followed in her assertion that if the trade name and brand were no longer allowed to be used for the 73 stores it operated, this would lead to disproportionate damage. The logo and many advertisements would have to be changed, resulting in high costs. Furthermore, this would reduce the goodwill of the stores. In the view of the court, there was also a  important role that the reorganization at the franchisor could also lead to the franchisee eventually being able to continue to use and use the brand and trade name, so that there was a threat of pointless damage against the franchisee.

On the other hand, the court had to weigh the interest of the franchisor: if the former franchisee were allowed to continue using the brand and trade name, two chains with the same name would exist under the same brand. The franchisor argued that his other franchisees would have problems with this and that this could damage the image and the brand.

The court weighed these interests against each other and ruled that the interest of the franchisee prevailed. In this case, the court considers the continued use of the brand and trade name to be less harmful than stopping their use. In this case, the franchisee is therefore allowed to continue to use the brand and trade name, without any compensation.

Being able to continue to carry, as a former franchisee, without a (franchise) agreement, an exceptionally well-known and valuable brand in the present situation is remarkable. It is certainly the case that this matter is special, in light of the reorganization that was going on at the franchisor and the fact that the parties had an extraordinarily long history with each other. The court took that seriously. Furthermore, the continued use of the name and brand is permitted for a certain period of time and not indefinitely. Nevertheless, this ruling opens the way for similar proceedings. There are several conceivable situations in which a franchisee can successfully argue that he is entitled to further use of the formula name, if in his opinion the franchise agreement has been wrongly terminated by the franchisor. It won’t be easy, but the possibility is there.

Mr DL van Dam  – Franchise attorney

Ludwig & Van Dam Franchise attorneys,franchise legal advice.

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