Suspension of non-competition clause in a franchise agreement

A franchisor defaults on the franchise agreement with his franchisees. The franchisees are required to seek work elsewhere. However, they are bound to a strict post-contractual non-competition clause. Can the franchisees still evade this clause? Thomas van Vugt, lawyer specialising in Dutch contract law, explains the petition to suspend a non-competition clause by the following case.

Dutch franchise system supports professionals

Franchisees are professionals with an expertise in the banking field. Franchisor employs a franchising system which allows professionals to better position themselves on the market. This system’s objective is the use of knowledge, labour and a network in the banking industry. Franchisor organises theme-based events, training and education for affiliated professionals.

Franchisees not “self-employed” according tax authorities

Until recently, the Tax Authority had defined the franchisees as self-employed entrepreneurs. This was tax efficient. However, the Tax Authority changed its views and considered the relationship between the franchisees and franchisor to be equivalent to employment. This gave rise to possible payroll taxes.

Termination of franchise agreement due to deficiency

Given this adverse change in applicable taxes, the franchisor stopped offering the (franchising) system that the franchisees could use as self-employed businesses. This gave rise to an imputable shortcoming of the franchisor towards the franchisees, and the franchise agreements were terminated. However, even after the termination, the franchisees were bound by a non-competition clause. This is why they have petitioned for the interim suspension of the clause.

Suspension of non-competition clause in franchise agreement

First, according to the consistent case-law, a non-competition clause in a franchising agreement is intended to enable the franchisor to transfer his know-how to the franchisee and to assist the franchisee in the application of his methods without running the risk of simultaneously benefiting his competitors with such know-how and assistance. Second, a non-competition clause can aid the franchisor in maintaining the identity and reputation of the franchise relationship symbolised by the system.

Protection of know-how, identity and franchise reputation

In this case, the franchisor did not transfer any know-how to the franchisees. No knowledge subject to protection by a non-competition clause was transferred. Neither does the non-competition clause aim to protect the identity of the franchisee. The system is not publicly visible. It very much looks as if the parties chose the “franchise” identifier when concluding “franchise agreements” mainly to enjoy tax advantages. Actual franchising is not apparent.

Suspension of the Dutch non-compete clause

The preliminary relief court deemed that by law the franchisor does not have any interest in maintaining the non-competition clause. On the other hand, it is clear that it is very difficult for the franchisees to offer their services elsewhere without violating the non-competition clause. The petition to suspend the non-competition clause was granted.