The Franchise is Over Now What...Learn about options after Franchising in Canada

Author: tgreenbloom@blaney.com

Date: APR 4th, 2014

Topic: Industry Experts

Franchise agreements have terms that can be as short as 5 years. When the franchise ends what can a franchisee do? Can the franchisee use the expertise, experience and relationships gained over the course of their franchise? The focus of this article will be on non-compete clauses. Before embarking on a discussion of non-compete clauses, some mention should be made of the franchisee’s premises and the impact the premises may have on the franchisee’s wishes. In some instances the premises will be irrelevant, because the lease ends at the same time as the franchise or the franchisor takes over the location, but it is possible that a franchise will still be responsible for its lease. Where a lease and a franchise do not end at the same time and the franchisor does not become the tenant, it is important for the franchisee to understand what it can do after the end of the franchise.

Most franchise agreements contain a non-competition clause that prohibits the franchisee from carrying on a competing business for a fixed period of time after the end of the franchise.

Courts, in determining whether or not to enforce a non-competition covenant, balance maintaining free and open competition and a disinclination to restrict the right, especially between knowledgeable persons of equal bargaining power. As a result of these competing themes courts often do not enforce a non-competition covenant against an employee, where a non-solicitation covenant will protect an employer. Will a franchisee be seen more like an employee with the weaker bargaining power and not being paid for goodwill, or more like the seller of a business, since the franchisee is effectively returning the business? Courts will enforce non- competition clauses against franchisees.

Even though a franchisee is subject to non-competition covenants, the following should be considered:

  • to be enforceable the restrictions must be reasonable with respect to the time of the restriction, the area restricted and the activity restricted
  • look carefully at the new business, it may not be the same as the franchised business and therefore not restricted (e.g. limiting coffee and tea to certified fair trade and organically grown was seen as a different business than a national coffee chain)
  • merely setting up a new company for the new business may not be enough to escape the covenant
  • involving others to try and circumvent a non- competition covenant obligation may not work, as third parties cannot benefit from a breach and cannot knowingly assist or participate in a breach
  • as an example, a husband setting up a new company for a business similar to that run by the wife with a non-competition covenant did not work; it did not help that the wife was seen at the new business and that assets from the old store were used in the new store
  • on the other hand a company set up by a father was not caught by the clause given by his daughter (even though the daughter was initially a director of the father’s company), because the menu items were very different and the father was an experienced restaurant operator

When a franchisee and franchisor agreement comes to an end the franchisee must be aware of the clauses that could potentially harm future businesses. Something that might seem very different could potentially fit under the non-competition clause since the agreement is so general. Double-check and be cautious before entering a new business that might seem somewhat similar to the past franchised business.