No contractual penalty for non-compete violation

Very recently, the District Court of Overijssel ruled in a judgment published this week that a franchisor’s claim for payment of a contractual penalty for breach of the non-compete clause by a franchisee is not allowable (ECLI:NL:RBOVE:2016:3742). This judgment is in line with an interim judgment rendered by the same court in June 2016 (click here for an article about the relevant earlier judgment).

A non-competition clause is included in the franchise contract concluded between the franchisor and the franchisee, who works as an independent kitchen fitter and installer.

According to the franchisor, the franchisee violated the non-compete clause both during the term and after termination of the franchise agreement. The franchisor therefore claimed payment of contractual penalties from the franchisee.

The court rejected the franchisor’s claim. The franchisor has not given the franchisee notice of default prior to the proceedings. In addition, according to the court, the franchisor has no legally protected interest in the fines demanded. The court explains that a non-compete clause in a franchise agreement primarily serves to enable the franchisor to transfer its exclusive know-how to the franchisee and to assist the franchisee in applying its methods. without running the risk that such knowledge and assistance may benefit competitors.

According to the court, that interest does not play a role in this case, because the franchisor has not stated that he has transferred know-how to the franchisee. According to the court, the franchisee has his own professional knowledge and skills, while it does not appear that knowledge in the field of kitchen fitting transferred from the franchisor to the franchisee is so exclusive that it deserves protection by means of a non-compete clause.

Moreover, according to the court, the imposition of the fines claimed by the franchisor would be contrary to reasonableness and fairness. In addition, the court pointed out that it was precisely the franchisor that was in default with payment of monies due to the franchisee at the time the franchise agreement was terminated. In that case, according to the court, the franchisor cannot reasonably blame the franchisee for trying to provide for his livelihood by building kitchens for his own account.

This is the second judgment within a few months in which the court rules that a franchisor’s claim based on a contractually agreed non-compete clause has been rejected.

A franchise attorney can advise franchisees and franchisors on contractual penalties and the enforceability of a non-compete clause included in a franchise agreement.                  

mr. J. van de Peppel – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice.

Do you want to respond? Go to vandepeppel@ludwigvandam.nl