Side effects of non-compete clauses

Many franchise agreements contain a non-compete clause, both during the term of the franchise agreement and usually for a year after its expiry. The purport of that clause is usually that during the term of the franchise agreement and the following year, the franchisee is generally not permitted to perform competitive activities with the organization of the franchisor. In itself, such a clause is a generally accepted means of preventing franchisees from too easily using the knowledge and know-how obtained through the franchise organization to compete with that same organization. However, an unintended side effect of that non-competition clause insofar as it pertains to the period after termination of the franchise agreement may be that it makes it impossible for the franchisee to meet certain obligations. After the franchise agreement has expired, the franchisee may still have to perform various actions in connection with either the transfer or the liquidation of his business. Such actions may in themselves be in breach of the non-competition clause. However, things become more pressing when there are ongoing legal obligations. Something similar occurs in practice in financial services franchise organizations. These services are regularly subject to the regime of the Financial Services Act (WFD). In that context, it must be certain, among other things, that an insurance portfolio of the franchisee in question is adequately managed, irrespective of the duration of a franchise agreement and therefore also after it has been terminated for whatever reason. This problem arises in particular when the franchisee concerned has a license under the WFD in his own name, on the basis of which he can act as an insurance intermediary.

In situations such as the present one, it goes without saying that consultation between franchisor and franchisee is an obvious step to resolve any problems amicably, with the interests of the franchisee’s customers first and foremost. Furthermore, it is advisable to take this problem into account where possible when drawing up and applying the non-competition clause in question.

Ludwig & Van Dam franchise attorneys, franchise legal advice