Article De Nationale Franchise Gids: “Franchisee exclusively bound by a non-compete clause as a private company” – mr. M. Munnik – dated January 11, 2022

On December 22, 2021, the Rotterdam District Court issued an (interim) judgment regarding the validity of the non-compete clause included in the franchise agreement of a franchise formula for mediation between independent healthcare providers and healthcare institutions. It is striking that the discussion about the validity of the non-compete clause is increasingly being submitted to the courts. The outcomes of these factual discussions seem to diverge (increasingly). Remarkable in this case, however, is that although the court rules that the non-compete clause applies, it only applies to the private company with which the franchise establishment is operated. However, the natural person behind this BV is not bound by the non-compete clause.

Referring to the dependent position of the franchisee and the fact that, in the opinion of the franchisee, there is no know-how that qualifies for protection, the franchisee claims the annulment of the non-compete clause (valid for one year after the end of the franchise agreement), at least limitation of its operation. However, the court rules that the franchisor has an interest in enforcing the non-compete clause and non-solicitation clause because it has been sufficiently substantiated that there has been a transfer of know-how.

Although the non-compete clause thus applies, its effect is still limited in various ways.

First of all, the court ruled that the non-compete clause only applies to the private company and not to the natural person ‘behind the exploitation’ (both of whom are parties to this matter). The court bases this on the fact that after the establishment of the franchise establishment as a sole proprietorship, the franchisor has agreed to incorporate this sole proprietorship into a private limited company. From that moment on, the sole proprietorship (and thus the natural person) is no longer a party to the franchise agreement. In the opinion of the franchisor, however, it was never the intention to release the franchisee as a ‘natural person’ from the non-compete and non-solicitation clause. However, the court rules that the private limited company must be regarded as a franchisee.

In addition, the franchisee has also objected to the fact that the non-competition clause is geographically unlimited. The court sees this as a reason to limit the effect of the non-compete clause and to seek affiliation with the districts in which the franchisee was active on the basis of the franchise agreement. Here the court appears to be seeking alignment with the Franchise Act. After all, on the basis of the Franchise Act, the geographic scope of a non-compete clause may not be wider than the area within which the franchisee has operated the franchise formula on the basis of the relevant franchise agreement. The Franchise Act also stipulates that if a non-compete clause is included in violation of this restriction, the clause is null and void. However, the court does not seem to go that far in its judgment. This may be due to the fact that the Franchise Act was not yet applicable to this franchise agreement.

The court’s judgment thus offers the franchisee the opportunity to continue the operation of its business outside the exclusive territory. In addition, only the private limited company seems to be bound by the non-compete clause, which makes operation possible within the district during the term of the non-compete clause by changing the entity by the natural person. This ruling shows once again that the parties would do well to properly record changes in their business form and the consequences thereof.