Franchise+ article: “Violation of a non-compete clause will cost the franchisee dearly.” – mr. C. Damen – September 23, 2021

The fact that the violation of a non-compete clause included in the franchise agreement should not be taken lightly by the franchisee has recently become clear once again. By judgment of 16 June 2021, the subdistrict court in Rotterdam ruled that the franchisee owes the franchisor a substantial compensation for violating the non-compete clause included in the franchise agreement.

This case concerned a Finnish retail concept aimed at the self-service market, where small entrepreneurs, artists and (web) retailers can rent a piece of retail space for a reasonable amount. Franchisor and franchisee concluded a franchise agreement, in which the franchisee was granted, among other things, the franchise rights to operate a branch within the franchise formula within the Emmen district. At some point, the franchisee terminates the franchise agreement and no new franchise agreement is subsequently formed, despite several attempts to do so. Nevertheless, the franchisee does not stop operating its establishment, but merely changes the name of its company.

Shortly before the end of the franchise agreement, the franchisor places a recruiting ad through the franchisee’s Facebook account for a new franchisee. Without the consent of the franchisor, the franchisee personally removes the recruitment advertisement and instead announces that it will continue to operate it under its own name once the franchise agreement expires. The franchisor was not pleased and suspended access to the franchisee’s Facebook account, after which the recruitment ad was reposted. The franchisee then summoned the franchisor to remove the advertisement immediately and held the franchisor liable for any damage it would suffer as a result. According to the franchisee, the franchisor violated the franchise agreement by denying her access to the Facebook account. The franchisor determined that the franchisee was in breach of the franchise agreement due to non-compliance with the post-contractual non-compete clause after the expiration of the franchise agreement and has issued contractual penalties in that regard.

The franchisee did not leave it at that and summoned the franchisor in proceedings on the merits. In those proceedings, she claimed damages for the infringement of her privacy and reputation by the franchisor as a result of the placement of the recruitment advertisement on the Facebook account of her franchise establishment. She also claimed compensation on account of the failure to comply with the franchise agreement, or at least the unlawful act by the franchisor due to the denial of access to the Facebook account of the franchise establishment. The franchisor, in turn, claimed the contractually forfeited fines for non-compliance with the non-compete clause and its compliance. According to the franchisee, the franchisor could not claim this because the non-compete clause was not validly agreed. That would be due to the fact that the franchisor only transferred very limited know-how. It therefore requested that the non-compete clause and the associated fines be annulled.

The subdistrict court does not grant this request in any way. The subdistrict court found that the franchise formula could only be operated if the know-how involved had to be protected by law. The subdistrict court also ruled that it is clear from the text of the non-compete clause that the franchisee has agreed to its applicability during the term of the franchise agreement and at the end of one year thereafter. At the hearing, the franchisor explained that the know-how transferred to the franchisee mainly relates to ICT and the cash register system. Furthermore, according to the franchisor, the non-competition clause also includes the possibility for a new franchisee to establish itself in Emmen. The subdistrict court is of the opinion that know-how has indeed been transferred to the franchisee and that the non-compete clause is precisely aimed at its protection. By already launching a Facebook page during the term of the franchise agreement and immediately afterwards (continuing) operating a store in Emmen according to the same formula and in the same building, the franchisee has performed a competitive activity, thereby hindering the franchisor from to find a new franchisee for the Emmen branch, according to the subdistrict court judge. In addition, the franchisee has also impeded this by removing the franchisor’s advertisement for a new franchisee on the Facebook page of the franchise location. The subdistrict court therefore concludes that the franchisee has violated the non-compete clause and some regulations in the franchise agreement. Finally, the subdistrict court noted that the non-compete clause is not unacceptable in the given circumstances according to standards of reasonableness and fairness. The Subdistrict Court considered that the non-compete clause in the franchise agreement was clearly formulated. There could be no misunderstanding for the franchisee that it had to refrain from competing activities for one year after the end of the franchise agreement. In this case, according to the subdistrict court, the franchisor clearly stated that the non-compete clause was necessary to protect its formula and to allow a new franchisee to start in the franchise establishment in Emmen, without competition from the franchisee. The Subdistrict Court is of the opinion that the franchisor is pursuing a justifiable interest in doing so.

Failure to (properly) comply with a legally agreed non-compete clause can cost a franchisee dearly. Therefore, pay close attention to what the parties agree in that context when concluding the franchise agreement. Even after this period, the franchisee is generally not free to compete with the franchise formula. In this case, for the franchisee, the adage “Look before you leap.”