Article De Nationale Franchise Gids: “Non-compete clause: ‘the devil is in the details'” – mr. C. Damen – dated April 2, 2021

In a judgment of 20 January 2021, the Rotterdam court once again confirmed how relevant the smallest details can be in the settlement of disputes regarding the possible violation of a non-compete clause in a franchise context.

This case concerned a mobile car cleaning franchise and two of its former franchisees. At any given time, two franchisees terminate the franchise agreement with the franchisor, after which a legally agreed post-contract non-compete clause will continue to apply after the franchise agreement has expired. Nevertheless, in the view of the franchisor, the franchisees exceed the post-contractual clause of non-compete and it initiates proceedings to that effect.

The franchisor’s franchise formula distinguishes itself in the market because it offers an ecological alternative to the well-known car wash. In addition, the formula pays attention to service at home or at a business location, specific high-quality steam cleaning and the possibility to also wash the interior of the car. None of the franchisor’s competitors would operate a similar formula. In addition, some new services were offered within the formula, such as paint sealing and leather treatment. In the formula handbook of the franchisor, the activities are described as: “an ecological alternative to the car wash. A service for the average car owner, consumer or business customer. No specialist service or products that compete with car specialists. (…) Service at home or at business location. (…) The quality of the steam cleaning is many times higher than the car wash, but is below that of the cleaning companies.”

The relevant question in this matter is whether the franchisees have breached the post-contract non-compete clause contained in the franchise agreement and are therefore liable to pay the franchisor the associated amount resulting from the penalty clause. In order to answer this question, it must be examined whether the activities performed by the franchisees for their own account and risk can be regarded as competitive with those of the franchisor’s franchise formula. The franchisor thinks so. It adds that the franchisees go even further beyond the non-compete clause in the franchise agreement by offering, at their own expense and risk, cleaning packages to customers that are identical or similar to what is covered by the franchisor’s formula. In addition, it believes that the franchisees operate jointly under the same name to the outside world and, on that basis, also act in violation of the post-contractual non-competition clause.

The franchisees believe they have not breached the post-contract non-compete clause. They argue that there are no equal or similar activities. Nor would there be any question of offering packages outside their area of ​​operation, since the garage of one of the franchisees is not in the area of ​​operation of the franchisor. The court endorses the view of the franchisees, in the sense that in its view acting jointly under the same name does not mean that they exceed the post-contractual clause of non-competition. According to the court, the scope of such a clause means that a franchisor wants to prevent a franchisee from using knowledge and know-how obtained from the franchise cooperation to develop competitive activities.

As to whether the franchisees are involved in activities that are the same or similar to those of the franchisor, the court considers that the activities must be the same as those of the franchisor. It is important to determine which activities the franchisor offers. In this case, the judge is of the opinion that the franchisees recondition cars in their activities – also known as card detailing – and that this is specialist work. During the procedure, an expert confirmed that card detailing involves a combination of activities that follow each other and that a perfect condition of the car paint cannot be achieved if the paint is not clean down to the last detail.

It has been established that the franchisees carry out these activities in their own workshop and not, as is the case in the franchisor’s formula, on location. In addition, the franchisor does not offer a specialist service or products that compete with car specialists and the quality of its steam cleaning is below that of the cleaning companies. In view of this, the court is of the opinion that the franchisor’s claim has been formulated too broadly. It has to be competitive activities and that is not the case when cleaning is carried out as a necessary part of card detailing, which in terms of car care goes one step further than cleaning by cleaning companies.

It follows from the foregoing that there is no violation by the franchisees of the post-contractual non-compete clause in the franchise agreements concluded with the franchisor. The franchisor’s claims are therefore rejected and she, as the unsuccessful party, is ordered to pay the costs of the proceedings.

It is therefore relevant for the franchising practice to accurately describe what specific activities can be regarded as competing activities with those of the formula. It is therefore recommended that you obtain proper advice in that context prior to concluding the franchise agreement. After all, prevention is better than cure.

Ludwig & Van Dam lawyers, franchise legal advice.
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