Sale of a franchise company due to a non-competition clause: False construction or not?

Franchisees who are unwilling or unable to continue with the franchise company experience whether or not the non-competition clause is valid or not. Continuing without a franchise is then risky. Does the clause apply or not? The outcome of a costly procedure is often uncertain. A solution may then be to sell the company to someone else who will continue the same activities without cooperation with the franchisor. Recently, the Arnhem Court of Appeal (ECLI:NL:GHARL:2018:3128) and the Overijssel District Court (ECLI:NL:RBOVE:2018:3489) ruled on the question of whether that sale should be regarded as a sham construction to evade the non-competition clause.

In the case of a Bruna entrepreneur, violation of the non-competition clause was assumed because after the sale there was still “involvement” with the successor company. In the case of the pellet stove formula JustFire, it was considered that the mere fact that the ex-life partner with whom the ex-franchisee was still in contact, but continued to sell stoves entirely at his own risk and expense, did not mean that there would be a sham construction. In other words, no involvement with the successor company was assumed. That involvement is therefore the assessment criterion.

In the latter case, it was also considered that in a claim for compliance with the non-competition clause, the fact that the franchisor takes the initiative to terminate can also be taken into account. The ex-franchisee of JustFire was faced with a rather abrupt dissolution.

Finally, the Court of Overijssel considers that mediating in the sale of stoves can also be regarded as an agency for the time being. Unlike franchise, agency is an agreement defined by law. Both rules for termination and the non-competition clause apply to this. That clause lapses in the event of irregular termination by the franchisor/principal.

Formula foreign sale of the franchise company is therefore a serious option when the franchise agreement is terminated.

mr. J. Sterk – franchise lawyer

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