Merged franchisor competes with proprietary franchisees

If a franchise organization is taken over, the intention may be that it is phased out in order to be integrated into the acquiring party. The question then is how to deal if potential customers flow from the franchisees of the acquired franchise organization to the new organization. The Midden-Nederland District Court ruled on such a matter on 29 July 2022, ECLI:NL:RBMNE:2022:3148.

Funeral organization Yarden has been taken over by competitor Dela. Yarden’s franchise organization and formula is being phased out to be integrated into Dela. Yarden’s customer contact center and phone number are at some point operated and handled by Dela. The services of Dela are also promoted in Yarden’s social media. As a result, Yarden’s franchisees suffer damage. The franchisees argue that Yarden competes with its own franchisees by referring to its (new) group company Dela.

Yarden stated that these are incidental errors, that effective measures have now been taken and that compensation is offered for the errors. The franchisees state that the errors and referrals continue. Furthermore, Yarden states that it cannot do much about the errors, but that it would be due to other organizations within its group, such as Yarden Uitvaarten BV

The court agrees with the franchisees and believes that the errors are not incidental, and that Yarden, as a franchisor, cannot hide behind the actions of affiliates. The court orders Yarden, as the franchisor, to cease referrals to Dela, under penalty of a penalty.

This judgment shows that the process of changing a franchise formula requires due diligence, which was lacking in this case.