Waiver of the non-compete clause

Most franchise agreements provide specific regulation of the consequences of terminating that agreement, whether after the term of that agreement has expired or prematurely. In most cases, part of that arrangement is a post-contractual non-compete clause. Incidentally, most franchise agreements also contain a non-competition clause that applies during the term of that agreement. The rationale of such clauses is, in particular, to protect the know-how of the franchise organization concerned. After all, in most cases a franchisee receives confidential information from the franchisor about the way in which the franchise concept functions and matters concerning the know-how of that concept itself. The franchisee is also brought into contact with the organization’s customers and suppliers, thereby building up an entire network that, in principle, should not benefit any competing organization. Against this background, most franchise agreements contain a clause that basically states that a franchisee may not engage in activities that compete with the products or activities of the franchise organization, both during and after the termination of the franchise agreement. The non-compete clause during the term of the franchise agreement is then often not territorially limited, because the franchisor assumes that an active franchisee should not, in any case, develop activities that compete with him, anywhere. The post-contractual non-compete clause is often limited to a certain area and a certain period.

Dispute

In practice, conflicts sometimes arise with regard to the post-contractual non-compete clause in particular. This in itself is not incomprehensible: for various reasons, the franchise relationship between the parties may come to an end. The franchisee concerned will then in many cases wish to be able to continue to practice his profession with his existing customers in his existing territory, which can be significantly thwarted by the post-contractual non-compete clause. The question is therefore often asked whether and to what extent such a non-compete clause can be affected.

Degradation: formulation

In general, infringement of a properly drafted non-compete clause is not that simple. However, if the clause is internally contradictory, or unclear, this may indeed lead to the invalidity of the clause. After all, the responsibility for the resulting ambiguity rests with the person who drafted the clause, namely the franchisor. It should be borne in mind, however, that if this ground is used as a ground of infringement, the clause may be interpreted by a court in a more restrictive way than may have been the intention of the franchisor, but is not set aside entirely, which means that the franchisee can bound to some form of non-competition, albeit in a form that is perhaps more favorable to him than originally thought. It goes without saying in this context that a franchisor would do well to formulate its stipulation as clearly as possible. In general, a logical structure and an unambiguous representation of what is meant by the clause is much more advisable than using the clause as a kind of all-in-one clause, which achieves nothing de facto due to its broad scope.

Attack: competition

A non-competition clause can also fail on competition law grounds, although this is not so simple in practice. The primary issue is whether the clause is in conflict with Article 6 of the Competition Act. If a franchisee wants to demonstrate that a non-compete clause is in conflict with Article 6 of the Competition Act, he will have to argue and prove that the non-competition clause prevents, restricts or distorts competition on the Dutch market. Even more important, however, is the question of whether and to what extent there is appreciability under competition law. The market share of the franchise organization in the relevant geographic market and the relevant product market plays a decisive role in this. It is going a bit far at this point to go into too much detail about the technique of this, but it should be emphasized here that there will not be any appreciability under competition law very quickly, certainly not at national level. This may be different at regional or even local level. A formula can have regional or local market dominance. However, this will have to be considered on a case-by-case basis.

On the basis of European competition law, it may also be important to determine whether and to what extent there is actually knowledge and know-how of the franchisor to be protected by the non-compete clause. In practice, however, it is quickly assumed that such know-how exists. However, there are examples where this was not the case. Here, too, it will have to be assessed on a case-by-case basis whether such a route has any chance of success.

Attack: error

In practice, non-competition clauses sometimes fail because the legal validity of the franchise agreement as a whole is affected. In particular, this should include discussions regarding what happened in the phase prior to the signing of the franchise agreement. The most well-known example of this kind of discussion is the so-called forecasting problem: before the franchisor enters into the franchise agreement, the franchisee is given a picture of the turnovers and results to be achieved with the franchise company. If these prove to be too optimistic in practice, this can lead to a successful appeal on the part of the franchisee on the part of the franchisee. On that basis, the franchisee can then proceed to annul the franchise agreement, whether or not extrajudicially. Nullification has retroactive effect, meaning that the franchise agreement never existed, including the non-compete clause included therein. In cases like this, however, something must actually be going on. Where appropriate, a court will of course consider who is responsible for the failure to meet the operating forecasts. A franchisee naturally also has its own entrepreneurial risk. There may be a variety of circumstances that contributed to the failure to meet those forecasts, and those circumstances may not always be within the franchisor’s sphere of risk. However, this is possible: practice shows many examples of franchisors who, consciously or not, have created too rosy expectations and have ultimately been held responsible for them.

Impairment: reasonableness

Finally, an attempt can be made to set aside a non-compete clause with an appeal to reasonableness and fairness or with an appeal to the unreasonable burden of that clause. Although technically different legal grounds, a court will treat both grounds relatively equally, since they are an extension of each other. In this case, in almost all cases, it will come down to weighing all the circumstances of the case, including the interests of the parties. In these types of situations, however, the guiding principle is that the agreements between the parties are governed by law: however restrictive in nature, the franchisee has, in his right mind as an independent entrepreneur, signed the franchise agreement, including the non-compete clause. Nevertheless, there may be circumstances that justify an appeal to the reasonableness and fairness or the unreasonably onerous burden of the clause, including the attitude of the franchisor itself. In particular, this should include, for example, serious attributable shortcomings in the fulfillment of the franchise agreement on the part of the franchisor and/or the problems in the preliminary phase already referred to above, namely overly optimistic operating forecasts that did not come true.

Conclusion

It may be seen from the foregoing that one should certainly not think too lightly about (post-contractual) non-compete clauses. It remains to be seen whether the clause will hold  nuanced. However, it is a condition that the clause is well drafted, clear and not internally contradictory. If all of these are the case, the franchisee must, in principle, comply with them. However, practice shows that it is indeed possible to set aside non-compete clauses under certain circumstances.

mr. DL van Dam – franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice Would you like to respond? Mail to info@ludwigvandam.nl