Circumvent post non-compete clause in franchising

On 3 April 2018, the Court of Appeal of Arnhem-Leeuwarden, ECLI:NL:GHARL:2018:3128, overturned an interim injunction of the District Court of Gelderland on competitive activities. According to the court, the relevant Bruna franchisee was allowed to continue the activities. The court saw this differently. 

The franchise agreement stipulated that the franchisee was not allowed to be involved in a company or organization that could be a competitor of the Bruna organization for a period of one year after the end of the franchise agreement. 

It has been established that The Read Shop is a competitor of Bruna. The former franchisee had indicated that it intended to establish a branch of The Read Shop at the relevant point in order to operate it as a franchisee of the Read Shop after the expiry of the one-year non-competition ban. 

The Court of Appeal ruled that the former franchisee was involved in the implementation of his plan with The Read Shop, as intended in the non-competition clause. This was done in three ways, namely by: 

(i)    lending staff to The Read Shop;
(ii)   the transfer to The Read Shop of the rental rights (in respect of – part of – the retail space), as well as;
(iii)   generating traffic from which The Read Shop benefited.

These three principles are explained as follows.

ad i)  Loaning personnel to a competitor 

By lending the staff trained under the Bruna flag to The Read Shop, the know-how of the Bruna formula present among those staff was used for the sale of The Read Shop’s range. Bruna was therefore in competition. 

Ad ii) Transferring rental rights to the competitor 

The former franchisee had made it possible for The Read Shop to establish itself in the retail space, which was used as a Bruna store immediately before. The former franchisee had terminated the lease within the framework of his plans for the future and was only allowed to use the rear part of that retail space as a subtenant for the time being. The fact that this was cast in a construction in which the former franchisee temporarily acted as a subtenant of the rear part of that space does not detract from this involvement with The Read Shop. 

Ad iii) Generating traffic 

Moreover, by housing its own (non-competing) store at the back of the same retail space as a shop in shop, the former franchisee has ensured that it also attracts customers for The Read Shop. In this way, the former franchisee promoted the operation and turnover of The Read Shop. 

The plan of the former Bruna franchisee to circumvent the temporary non-competition ban in order to start working as a franchisee of The Read Shop afterwards does not stand the test of the Court of Appeal. According to the court, the prohibition apparently also concerns involvement with a competitor, if that competitor is involved in circumventing that competition prohibition. 

mr. AW Dolphin  – franchise lawyer 

Ludwig & Van Dam Franchise attorneys, franchise legal advice. Do you want to respond? Go to dolphijn@ludwigvandam.nl .