Franchise Non-Competition Clauses: Are They Valid? What You Need To Know!

Author: f.alepin@alepin.com

Date: DEC 6th, 2012

Topic: Industry Experts

A non-competition clause is the name given to a contractual undertaking to not compete with somebody else. Such a clause will often be referred to as, simply, a non-compete.

A non-competition clause may be valid if it is drafted so as to meet strict criteria, as established by the law, as discussed by legal scholars and as interpreted by the jurisprudence.

WHERE DO WE FIND NON-COMPETITION CLAUSES?

    We generally find non-compete clauses within the following types of contractual relationships:

  1. Employment contracts;
  2. Contracts for the purchase and sale of a business;
  3. Shareholders agreements or partnership agreements;
  4. Specific agreements between businesses, or for cooperation amongst various businesses, for particular purposes;
  5. Licencing agreements;
  6. Franchise agreements.

WHAT IS THE PURPOSE OF THE NON-COMPETITION CLAUSE?

Generally speaking, such clauses provide, for example, within franchise agreements, that if such an agreement would terminate, for any reason, that the franchisee undertakes to not compete with the franchisor in any manner whatsoever.

WHAT REQUIREMENTS MUST BE MET FOR THE CLAUSE TO BE VALID?

The criteria may vary in their importance with relation to the fact that we are talking about, on the one hand, a contract of employment, or on the other hand, a contract for the purchase and sale of a business. The courts are much more severe with respect to the said criteria when studying employment relationships, because of the principle of the freedom of employment that may be limited by a non-compete clause. We must be aware that the criteria, which we will discuss hereinbelow, are interpreted restrictively by the courts, which are not at ease to interpret such clauses in favor of employers or even franchisors, if such clauses do not, for example meet all the criteria for validity.

The three main criteria are as follows:

  1. The clause must be limited in time: The clause must be limited in time, for example, for a certain number of years or for a certain number of months, after which the person bound by the non-compete clause will be permitted to compete. A clause which is unreasonable in terms of its duration will not be shortened by the court but will be simply considered as null and of no effect;
  2. Ambiguous clauses will be interpreted against the person who stipulated or imposed the clause and in favour of the person bound by the clause
  3. The clause must be limited geographically: In effect, there must be a geographical limitation to the clause and the geographical limitation must be reasonable regarding what is necessary to protect the interests of either the employer or the franchisor;
  4. The clause must be drafted so that the area of non-competition is both clear and limited to what is necessary: For example, a non-compete clause in the restaurant business could not prohibit someone from working in the food business generally. Also, for example, a clause imposed by an employer operating a business of repairing and replacing mufflers would not be valid if it prohibited his ex-employee from working in the automobile industry generally, without further precisions.

It should also be known that, pursuant to the principles of interpretation under the Civil code of Quebec, an ambiguous clause will be interpreted against the person who stipulated or imposed the clause and in favour of the person bound by the clause. This means that, because such clauses are generally included in contracts prepared by an employer or a franchisor and which are submitted to the employee or the franchisee for signature, in the case of ambiguity, such clauses will be interpreted against the employer or the franchisor, as the case may be.

WILL THE COURT CHANGE A NON-COMPETITION CLAUSE?

No, the court will purely and simply annul the non-compete clause if it does not meet the criteria for validity. The court will not intervene in its judgement to rewrite an invalid clause, for example, by shortening the time period of the clause or by limiting the applicable territory of the clause.

WHAT SHOULD I DO IF SOMEONE VIOLATES A VALID NON-COMPETITION CLAUSE?

  1. Send a letter of demand requiring that the person ceases violating the clause, in lieu of which legal proceedings will be taken;
  2. Legal proceedings are taken against the violator of the non-compete clause, including a motion for a provisional and/or interlocutory injunction, enjoining the violator to respect the non-compete clause;
  3. And, in case he does not respect an injunction;
  4. Obtain an order of contempt of court for the violation of the injunction judgement, which exposes the violator to a fine of up to $ 50 000 and/or imprisonment that can extend up to one (1) year.

IS IT REASONABLE TO HAVE A NON-COMPETE CLAUSE IN A FRANCHISE AGREEMENT?

Certainly. We believe that the franchisor who grants to his franchisee, subject to certain conditions, the right to use his concept, to use his trademarks, and to have access to his business secrets, but sees his franchisee use these elements of the franchise system in an improper way, will see an important weakening of the value of his business, which is, specifically, the operation of the network of franchises in an organized manner within a specific territory.

A franchisee who wishes to join a franchise network where franchises are not bound by a non-compete clause is taking a risk that his franchisor will not be able to protect the franchise system

We believe that a franchisor who does not have a non-compete clause in his standard franchise agreement is depriving himself of a necessary tool to protect his business concept.

From the other side, a franchisee who wishes to join a franchise network where franchises are not bound by a non-compete clause is taking a risk that his franchisor will not be able to protect the franchise system, which is the very reason that the franchisee decided to get into business with the franchisor.

If you have any doubts whatsoever, before going any further, it is important to consult your legal advisor.

- François Alepin, lawyer

This article contains legal information of a general nature and cannot replace legal advice given by a lawyer who will examine the details of your particular situation.