How far does the non-competition clause extend?
The Supreme Court recently issued a judgment regarding a non-competition clause in a franchise relationship.
From a specifically established private company, X supplies automation work to the competitor of the former franchisor. The franchisor has previously purchased X’s business. The question arises to what extent X has violated the non-competition clause in the purchase agreement by selling to the competition. Strictly speaking, the automation activities do not fall under the core activity of the ordered and intended under the non-competition clause. However, the franchisor shows that the activities have been used as a cover, since X is closely involved in the creation of a formula that competes with him. The activities turn out to be specifically aimed at the competitor’s store concept and, moreover, are not supplied to other customers.
Both the District Court and the Court of Appeal come to the conclusion that there is indeed a cover-up and that the non-competition clause should therefore be honoured. X is sentenced to pay very high fines, rising to more than € 800,000 on appeal.
The Supreme Court rules that the Court of Appeal has not ruled on correct grounds and refers the case to another Court to reassess the whole. However, the case shows that constructions used to circumvent the non-compete clause are extremely risky.
A franchisee who has doubts about the interpretation of the non-compete clause would be wise to carefully and carefully consider whether or not the new activities fall under this clause. Coordination with the former franchisor can prevent many problems in this regard. If this does not yield results, a very careful consideration in another way is necessary.
Mr Th.R. Ludwig – Franchise lawyer
Ludwig & Van Dam Franchise attorneys, franchise legal advice Would you like to respond? Mail to ludwig@ludwigvandam.nl
Other messages
Waiver of non-competition clause by franchisee
Waiver of non-competition clause by franchisee
End of main lease does not mean end of sublease with franchisee
On 7 July 2015, the Court of Appeal in Den Bosch overturned a judgment of the District Court of Limburg on the concurrence of a franchise agreement and a sublease agreement.
Chronicle Jurisprudence Franchise Law 2014
Chronicle Jurisprudence Franchise Law 2014
Attorneys Ludwig & Van Dam look back on transition process C1000
Attorneys Ludwig & Van Dam look back on transition process C1000
Court of Appeal upholds misrepresentation and wrongful conduct in the event of an unsatisfactory prognosis
The franchisee claimed annulment of the franchise agreement on the grounds of error, because the franchisor allegedly presented an unsatisfactory prognosis.
Directors’ Liability Concerning Franchising: Deception or Collaboration Plan
Directors' Liability Concerning Franchising: Deception or Collaboration Plan