The hardness of a non-competition clause in bankruptcy
Most franchise agreements contain post-contractual non-competition clauses, meaning that the former franchisee may not operate in the industry in which he operates, whether or not limited to the former location, exclusive territory, or even broader designation. Does this clause now also work if the franchisor goes bankrupt?
In the event of bankruptcy of the franchisor, the trustee assumes the rights of the former franchisor. The trustee represents the interests of everyone involved in the bankruptcy, including the creditors. In his capacity, the trustee is entitled to demand compliance with the post-contractual non-competition clause. Contrary to popular belief, the franchisee is therefore not released from its non-compete obligations on the grounds that the franchisor has gone bankrupt.
However, bankruptcy does not just happen. It is not uncommon for the franchisor’s conduct to be relevant to the cause of the bankruptcy. If that is the case, the franchisees suffer damage that can in principle be attributed to the franchisor. This line can then be extended to the trustee. The franchisees can therefore hold the trustee liable for the damage suffered. An important condition for successfully addressing the trustee is that the estate offers the necessary redress. That is not always the case. However, it is indeed possible for franchisees to do what is necessary against the invocation of the non-compete clause by the receiver. In practice, this usually leads to consultation between the trustee and the franchisees, in which an arrangement is reached that is satisfactory to all parties. However, a satisfactory settlement is never really realized in a bankruptcy. Damage has occurred for all parties, and there is usually little choice but to limit the negative consequences as much as possible. Alert franchisees are therefore advised to take the right steps in the event of an impending bankruptcy, as outlined earlier in this section.
Ludwig & Van Dam franchise attorneys, franchise legal advice
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