A "Pet Valu" franchisee in Ontario claimed that sales
were declining, so the owner tried to escape her franchise
agreement. After termination of the agreement, her husband
established a competing "Pet Stuff" business nearby. When
a franchise location fails as it did in this case, what happens
with the "restrictive covenants" in the agreement? Can
these provisions be circumvented by the use of a separate company,
or by using a friend or family member?
If you are in the franchise business, either as a franchisor or a
franchisee, you will undoubtedly have to deal with
"restrictive covenants." These are the provisions in the
franchise agreement that control what the franchisee can do after
the termination of the agreement. Most franchise agreements contain
clauses prohibiting the franchisee from establishing a competing
business, soliciting customers, or using confidential information
of the franchise.
The recent decision in Pet Valu Canada Inc. v. 1381114 Ontario
Limited (2013 ONSC 5361) dealt with an ex-franchisee who
established a competing business through her husband's numbered
company within a few blocks of an existing Pet Valu location. Pet
Valu, the franchisor, applied to the court for an injunction to
compel the ex-franchisee to stop this competition. Pet Valu sued
both the Franchisee and her husband, and each of their companies.
Pet Valu argued that the actions of the ex-Franchisee breached the
terms of the Franchise Agreement that prohibited:
The operation of a competing business for a period of 2 years
after the end of the Franchise Agreement within a 20 km radius of
any other Pet Valu store,
The hiring of any employee of a Pet Valu franchise for 1 year
after the end of the Franchise Agreement, and
The use of customer lists, confidential information and all Pet
Valu-branded signs, labels and price tags after the termination of
The Court in this case had no trouble looking behind the
"transparent effort" on the part of the ex-Franchisee to
establish a competing "Pet Stuff" business. The "Pet
Stuff" business also hired a store manager who had previously
worked at the Pet Valu franchise, and even made use of shelving and
inventory with distinctive labels, price tags and product codes
from the old Pet Valu franchise. The Court issued an interim
injunction against the ex-Franchisee and her husband.
Look for Part 2 and 3 in future editions of the Advisor.
Should you require further information and advice on franchise
agreements, please contact Field Law's Business Law Group. We
can assist you in negotiating franchising issues, and making
choices that are appropriate for your business plan.
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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