What is the Competitor Franchisee in Canada?

Author: BeTheBoss.ca

Date: APR 30th, 2019

Topic: Industry Experts


During your franchise research, you may have come across the term or concept of "competitor franchisee". This is a franchisee who uses the franchisor's propriety or inside information against it or who unfairly competes against a franchisor. This is specifically disallowed under the different franchise laws found across Canada, with most franchise agreements containing non-competition clauses that are broadly worded to prevent former or current franchisees from abusing a loophole. This tends to be a clause a franchisor won't budge on, so it's rare that a franchisee is able to negotiate its removal from the agreement.

 

However, since there is a power disparity between franchisor and franchisee in these agreements in favor of the franchisor, courts in Canada often handle competition franchisee disputes between franchisor and franchises the way they do non-competition clauses in employment contracts. This means, generally speaking, that if a competition clause unfairly restricts trade for a former or current franchisee, the court may not view it as enforceable unless the franchise can show the restriction is reasonable.

 

If, for example, a franchisee is with a famous coffee chain and sets up his or her own coffee store using a similar name and style, that's likely going to be considered unreasonable by the court if the franchisor challenges it. However, if he or she opens a distinct coffee shop that doesn't use any insider or proprietary information of the coffee franchise, that's likely reasonable. The same applies if the franchisee opens a breakfast cafe that offers coffee. Common practices in the coffee industry itself are not going to be considered a proprietary interest the coffee brand could protect because non-competitive clauses aren't meant to stop organic competition in the market.

 

In addition, a franchisor can't enforce a non-competition clause forever. A reasonable length would depend on the brand, industry and circumstances involved, but generally speaking, case law shows that two years or less are considered reasonable by the courts. A franchise would have to demonstrate why longer clauses are necessary to have that upheld in court.

 

Competition is generally encouraged in a capitalist economy because it means consumers can access a variety of services and goods. However, prospective, current and former franchisees all need to be aware of the possible legal repercussions if they start or are thinking about starting what could be viewed as a competitor franchise business.