Hard or soft? That makes a difference!

Hard or soft? That makes a difference!

In practice, one finds a wide variety of franchise formulas. It is important to distinguish hard franchise from soft franchise .

In short, soft franchising gives the franchisee more freedom to operate his business as he sees fit, but the franchisee will generally receive less support from the franchisor.

With hard franchising, matters are arranged more tightly from above by the franchisor and there is (much) more central management and guidance of the franchisee by the franchisor. This leaves less room for the franchisee to act at his own discretion. The reason for this is that, especially with hard franchising, issues such as uniformity, identity, image and brand awareness play a much greater role than with soft franchising, which requires tighter management.

The fact that the difference between soft and hard franchise can have not only practical differences but also legal consequences is evident from a recently published ruling by the summary proceedings judge of the Amsterdam District Court of August 1, 2022. [1]

These proceedings concerned the question of whether a franchisee was bound by a post-contractual non-competition clause. A franchisee requests an exemption from this. It was the franchisee’s intention to operate the same type of business at the same location under his own name, but with a different entity, after the franchise agreement expires. But that is precisely what the franchisor tried to prevent with the post-competition ban, partly because, according to the franchisor, the franchise formula qualifies as a hard franchise.

In this case, the judge determined that with hard franchising, as in that case, identity, image and name recognition play a major role, unlike in some other decisions where there was ‘soft franchising’ in which these characteristics did not play a role. Now that in itself is nothing new. But what was striking was the consequence that the judge attached to this, namely:

that the franchisor therefore has a compelling interest in preserving, or at least being able to protect, the know-how, identity and reputation associated with its franchise formula, as a result of which the franchisor can hold the franchisee to the post-contractual non-competition clause.

In short, the franchisor could hold the franchisee to the post-contractual non-competition clause. The judge therefore prohibited the franchisee from developing activities at the location of the branch that are similar and/or competitive to/with the activities of the franchisor for a period of one year after the end of the franchise agreement.

Conclusion

In practice, it often happens that the franchisee, after expiry of the franchise agreement, wishes to continue the existing business and thereby attempts to avoid the post-contractual non-competition clause. It follows from this ruling that in the case of hard franchising, franchisees will be less likely to be able to successfully argue that there is no compelling interest of the franchisor to protect the know-how, identity and reputation associated with the franchise formula.

[1] ECLI:NL:RBAMS:2022:8010.