In short – yes, where the restraints are reasonable
When a Franchisee enters into a Franchise Agreement there are
general restraints prohibiting Franchisees from competing with the
franchise business during the term and for a period after
expiration of the term.
Restraint of Trade clauses are generally considered by courts to
be anticompetitive and therefore unenforceable however they are
recognised as being enforceable in limited circumstances such as
the sale of a business (where the Vendor is prohibited from
competing with the Purchaser) and Franchise Agreements.
Franchisors need to ensure their restraint and non compete
provisions are carefully worded to be legally enforceable.
Franchisees can be prevented from de-branding and setting up a
competing business during the term and for a period after the
expiry of the term.
Most Franchise Agreements contain a 'covenant against
competition' or 'restraint of trade' clause to protect
the Franchisor's goodwill and prohibit Franchisees using the
Franchisor's know how.
A restraint clause will not be enforceable if it goes
beyond what is considered reasonably necessary to protect the
legitimate commercial interests of the Franchisor.
In an effort to ensure the widest possible protection many
franchise agreements include a "cascading restraint
clause", which sets out a range of restraint areas and periods
so that if the wider areas and/or periods are considered
unreasonable by a court, the clause can be read down and enforced
for a shorter period of time and/or within a smaller area. This
reduces the risk to the Franchisor that the whole restraint clause
will be unenforceable.
For example if a restraint clause seeks to prevent a Franchisee
from competing for a period of 5 years after the termination of the
agreement within 5 kilometres of every franchise outlet in the
system, it is likely this would be considered unreasonable and
therefore unenforceable. However, if an agreement contained a
cascading restraint clause, the clause could be read down to a more
reasonable level (e.g. 12 months and a 2 kilometre radius of the
franchise site) that may be considered reasonable and therefore
Protection of Franchisor's Intellectual Property
Franchise Agreements grant franchisees a licence to use the
Franchisor's Intellectual Property. That right ceases upon the
expiry or termination of the Franchise Agreement.
Franchisor's can take action to prevent a Franchisee from
infringing use of their Intellectual Property (name, logo, know
how, recipes etc.).
Franchisors are also protected under the misleading and
deceptive conduct provisions of the Competition and Consumer
Act 2010 and can also rely on the Common Law passing off to
restrain Franchisees from using the Franchisor's confidential
information or intellectual property and sell products or services
under a name or logo deceptively similar to that of the
In order to take action against a Franchisee (or any third
party) passing off their goods, services or brand as the
Franchisor's, the Franchisor will need to establish:
that it has a reputation in the jurisdiction (i.e. that it is
well known in the market);
that the Franchisee's conduct has been deceptive or might
produce deception; and
that this conduct has damaged the franchisor's reputation
in the jurisdiction (in some cased the mere suggestion that the
Franchisee is associated with the Franchisor may amount to
Franchisors cannot however prevent a Franchisee from setting up
a competing business outside of the restraint period and area
provided they are not engaging in misleading and deceptive conduct
or using the Franchisor's intellectual property.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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