It is entirely understandable and natural.  Unlike the lobster that enters the pot, franchisors and franchisees invariably have at least one eye to the future when they may no longer be parties to a franchise agreement.

Indeed, without doing so can have critical consequences, particularly for the franchisor’s business model and the brand which is at the heart of the franchise.

Unfortunately, this may well be the fate of a Spanish clothing services franchisor following a recent decision of the European Court.

It granted a 5 year franchise for Burgos in Spain.  The franchise agreement included a non-compete restriction on the franchisee.  This restriction was to last for the duration of the franchise agreement and for one year following its termination.

Non-compete restrictions can come in all shapes and sizes, but what is critical is to consider:

  • the duration of the restriction;
  • the geographical area covered;
  • the extent or activities being restricted,

and whether the restriction is lawful and so may be enforced.

When the franchisee terminated the franchise agreement without cause, the franchisor claimed damages and sought to enforce the non-compete restriction which covered the whole of the territory granted to the franchisee under the terms of the franchise agreement.  

But before the Spanish court the question arose as to whether the restriction infringed the EU regulation which exempts franchise agreements under the EU competition law.  The question was referred to the European Court.  

The EU regulation provides that the restriction is lawful where it is limited to “the premises and land from which the buyer [franchisee] has operated during the contract period”.

But did “premises and land” mean only the place or physical space from which the franchisee operated or was the phrase to be interpreted to include the territory granted under the franchise agreement?

For the European Court the answer was clear.  Given the objective of the exempting regulation, an extensive interpretation applying to the whole territory was rejected.  Instead “premises and land” was to be given a common sense, literal interpretation and the franchisor received a ruling that it did not want – the now ex-franchisee could not be prevented from competing throughout the franchise terriory.

Giving early thought as how to exit a franchise agreement can often save businesses considerable management time and legal fees in the future.

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