Infringement of franchisee’s exclusivity rights: franchisor liable

Franchise agreements often contain exclusivity provisions that give franchisees the exclusive right to operate a business in a specific area in accordance with the franchise formula of the franchisor. Such provisions prohibit the franchisor from permitting others to use the franchise formula in the exclusive territory.
Recently, in preliminary relief proceedings (see District Court of Gelderland, 9 September 2016, ECLI:NL:RBGEL:2016:5311), litigation was brought about the consequences of a violation of the franchisee’s exclusivity right. The franchisor had entered into a franchise agreement with a franchisee (hereinafter referred to as franchisee A) who was entitled on that basis to apply the formula within a radius of 5 kilometers around the franchisee’s place of business for the duration of the franchise agreement.

Despite the agreed exclusivity, the franchisor had nevertheless concluded a franchise agreement with another franchisee (hereinafter: franchisee B) who was located at a distance of 4.65 kilometers as the crow flies. After franchisee A confronted the franchisor about this, the franchisor wrongly stated that the franchise agreement with franchisee B was concluded before the franchise agreement with franchisee A and that therefore franchisee B would have the oldest right.

However, the court in preliminary relief proceedings did not follow the franchisor’s argument and ruled that the franchisor was obliged to comply with the exclusivity provision of franchisee A. It was established in the proceedings that A had concluded a franchise agreement before B. However, according to the judge in preliminary relief proceedings, it is not relevant which agreement was entered into first, since there is no hierarchy under the law of obligations with regard to the rights that the two franchisees can derive from the franchise agreement against the franchisor. The franchisor is therefore obliged towards both franchisees to comply with the franchise agreement.

The conclusion that the judge in preliminary relief proceedings then draws from this is that the franchisor must cease the performance of the franchise agreement with franchisee B within two days. According to the judge in preliminary relief proceedings, the fact that the franchisor may become liable to pay damages to franchisee B as a result is a circumstance that must be borne by the franchisor.

Of course, a franchisor cannot grant the same right twice in respect of the same territory. He cannot grant the exclusivity right that has already been granted again. The franchisee with the oldest exclusivity right can demand successful performance, but the second franchisee will be able to claim (substantial) compensation.

The Dutch Franchise Code (NFC) requires that the area of ​​exclusivity is inviolable. A franchisee can therefore also make use of this in the future.

mr.  DL van Dam – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice.
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