Post non-competition ban on services and sales franchise

When a franchise agreement ends, many franchisees encounter a prohibition in the franchise agreement to perform similar work for a certain period of time thereafter. Such a post-non-competition ban can sometimes be extremely onerous. On the other hand, it has not been agreed for nothing.

The District Court of Rotterdam ruled in preliminary relief proceedings (ECLI:NL:RBROT:2018:9610) on the question of whether a franchisee could still escape the prohibition of competition after the end of the franchise agreement.

Protection of know-how and assistance provided

The franchisee wrongly argues that no know-how was transferred. This transfer would be evidenced by training, meetings and updates. With reference to the Pronuptia judgment (CJEU 28 January 1986 no. A161/84, ECLI:NL:XX:1986:AC9213), the court rules that, in addition to know-how, assistance provided by the franchisor in the application of the (commercial) methods may be protected by means of a non-compete clause.

Know-how in service and sales franchising

In contrast to sales franchising, service franchising means that the franchisee could have acquired the necessary knowledge (entirely) for the provision of those services. In those cases, a non-compete clause could then be set aside because hardly any know-how has been transferred. This is the case, for example, in the judgments of the District Court of Overijssel of 22 June 2016 (ECLI:NL:RBOVE:2016:2914) and 21 September 2016 (ECLI:NL:RBOVE:2016:3742). However, in the present case there is talk of sales franchising.

Analogy to labor law

The franchisee referred to the rules in employment law. Article 7:653 paragraph 4 of the Dutch Civil Code stipulates that an employer cannot derive any rights from a non-competition clause if the termination or non-continuation of the employment contract is the result of seriously culpable acts or omissions on the part of the employer. It is common ground that the present case does not involve an employment contract, but a franchise agreement. So the comparison does not hold.

Unreasonably onerous general condition

Under certain circumstances, provisions in franchise agreements may qualify as general terms and conditions if they are designed to be incorporated into a number of agreements, with the exception of clauses that indicate the core of the performance. If the non-competition clause could be qualified as a general condition, it could perhaps be affected due to unreasonable objection. However, the preliminary relief judge rules that the non-compete prohibition is indispensable for the protection of the know-how transferred by the franchisor and the assistance provided that there is a core clause.

Conclusion

In this case, the franchisee was bound by the prohibition of competition after the end of the franchise agreement. However, a non-competition prohibition is not inviolable in all cases. For example, if no know-how has been transferred and no assistance has been provided. This is apparently more likely to be the case with service franchises than with sales franchises. However, this is by no means a hard rule.

mr. AW Dolphin  – franchise lawyer

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