The non-competition clause in the franchise agreement

Franchise attorney, franchise agreement, non-compete clause

A common clause in the franchise agreement is a so-called post-contractual non-compete clause. In short, such a clause means that a franchisee is prohibited from developing certain activities in a certain area for a certain period after the termination of the franchise agreement. If the (former) franchisee violates this prohibition, a contractual penalty is often due. Experience shows that such post-contractual terms often lead to conflicts between the franchisor and the (former) franchisee. The (former) franchisee is usually of the opinion that the clause is too far-reaching and can be called unreasonable, while the franchisor simply wants compliance with the clause that the parties contractually agreed upon when entering into the franchise agreement. It is then often up to the judge to tie the proverbial knot. In this article some comments about such a clause. What is legally possible with regard to a post-contractual non-compete clause in an employment contract is determined in Book 7 Title 10 of the Dutch Civil Code.

However, what is legally possible with regard to a post-contractual non-compete clause in a franchise agreement cannot be found in so many words in the Dutch Civil Code. To answer the question of what restrictions can and may be placed on a (former) franchisee, one must look at national and European competition legislation, such as the Dutch Competition Act. It will also be possible to test against the rules of reasonableness and fairness, which rules are included in the Civil Code.

It should be stated first and foremost that a post-contractual non-compete clause is in principle contrary to the cartel prohibition, as described in the Competition Act. The reason for this is that a post-contractual non-compete clause restricts competition (ie: competition). However, there is European legislation available that allows, under certain conditions, a post-contractual non-compete clause to be included in a franchise agreement. In particular, four conditions are important, namely: a) the term must relate to goods or services that compete with the goods or services provided to customers by the (former) franchisee during the term of the franchise agreement; b) the clause must be limited to the spaces and sites where the (former) franchisee has worked during the term of the franchise agreement; c) the clause must be indispensable to protect the franchisor’s know-how; d) the duration of the clause is limited to one year after the end of the agreement.

If a post-contractual non-compete clause meets these conditions, there is a considerable chance that the clause will be admissible in the eyes of a court. However, if the clause does not meet these conditions, this does not immediately mean that it is inadmissible. Other (competition law) elements also play a role in this. In that case, however, the rules of reasonableness and fairness may mean that the nature and scope of a post-contractual non-compete clause is still limited, because a weighing of interests requires this. After all, a non-compete clause can in principle never extend so far that the (former) franchisee is actually made completely ‘breadless’.

In concrete terms: if a (former) franchisee is prohibited, for a period of one year after the termination of the franchise agreement, from developing the same activities (as during the franchise agreement) from the location where he actually operated his business, then that is usually an acceptable term. If there was no permanent location, then the district in which the (former) franchisee actually worked is also acceptable. The franchisee will then have to come up with additional arguments why he could not reasonably be bound by the non-compete clause.

A post-contractual non-compete clause that, however, is not limited in any way with regard to duration and/or locality, may irrevocably meet resistance in proceedings, either on the basis of competition law elements, or because of the (un)reasonableness and (un)fairness of the clause. Common sense is (often) a good yardstick, although as a franchisee it is good to realize that, in principle, “a deal is a deal”, or “what you have agreed, you must fulfill”. Also with regard to a non-competition clause. It is therefore wise not to rely solely on the rules of reasonableness and fairness.

The advice to the franchisor is therefore to keep post-contractual non-compete clauses within reasonable limits. If this is not done, the franchisor risks that the clause will either be completely disapplied by a court, or that the effect of the clause will be (significantly) limited. The franchisee, in turn, should be aware of the nature and scope of a post-contractual non-compete clause when entering into the franchise agreement. If that clause looks unreasonable, it is wise to discuss this directly with the franchisor and to negotiate a less far-reaching clause. After all, it remains risky to have to discuss a non-compete clause in court if you, as a franchisee, have previously agreed to such a clause.

Ludwig & Van Dam franchise attorneys, franchise legal advice