Suspension non-competition clause in a franchise agreement

When you start a franchise in the Netherlands, you will probably sign a post-contractual non-competition clause. If a franchisor no longer fulfils the franchise agreement, franchisees will have to look for work elsewhere. Such a search may be delayed considerably by the non-competition clause. In this case, the main question was whether in such circumstances the franchisee can still get out of the non-competition clause. Dutch contract lawyer Thomas van Vugt explains the request for suspension of the non-competition clause.


Dutch franchise method supports professionals

The franchisees are professionals with expertise in the area of banking. The franchisor operates a franchise method that allows professionals to present themselves on the market. The purpose of this method is to exploit knowledge, labour, and a network in the banking sector. The franchisor organizes theme days, courses, and training for its member professionals.

Tax authority: Dutch franchisees are no longer ‘self-employed’

Until recently, the tax authority had considered the franchisees as self-employed operators. This had tax advantages for them. However, the tax authority changed its point of view and from then on regarded the relationship between the franchisees and the franchisor as an employment relationship. With possible payroll consequences.

Cancellation franchise agreement due to shortcoming

Given this unfavourable change in the tax regime, the franchisor ceased to offer the (franchise) method that the franchisees could use as self-employed operators. This resulted in an attributable shortcoming of the franchisor towards the franchisees, and the franchise agreements were terminated. However, the franchisees were still tied to a non-competition clause after the termination. They therefore sought interim relief to suspend the clause.

Suspension non-competition clause in franchise agreement

According to settled case-law, the purpose of a non-competition clause in a franchise agreement in the first place is to allow the franchisor to transfer his know-how to the franchisee and to grant the franchisee assistance in applying his methods, without running the risk of that know-how and assistance benefitting competitors. Secondly, a non-competition clause can help the franchisor to maintain the identity and reputation of the franchise connection symbolised by the method.

Protection of know-how, identity, and reputation of franchise

In this case, the franchisor had not transferred any know-how to the franchisees. Therefore, there is no transfer of knowledge to be protected by means of a non-competition clause. Neither does the non-competition clause seek to protect the identity of the franchisee. The method is invisible to the public. Therefore, it very much seems that at the time of conclusion of the ‘franchise agreements,’ the parties chose the term ‘franchise’ primarily with the intention to benefit from the tax advantage. There is no evidence of actual franchising.

Suspension non-competition clause

The judge, therefore, considered that the franchisor does not have an interest to be respected by law in allowing the non-competition clause to subsist. 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 request for suspension of the non-competition clause was, therefore, allowed.