Non-Competition Clause in a Franchise Agreement

Beginning a new franchise can be extremely challenging, making the professional advice of a franchise lawyer invaluable.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

A non-competition clause in a franchise agreement is a restrictive covenant that prohibits a franchisee from operating a business that competes with the franchisor's system. It is a restrictive covenant intended to protect the franchisor's proprietary interests, such as trademarks, trade secrets, and business models. This clause typically applies both during the term of the franchise agreement and for a specific period after it ends.

For a non-competition clause to be legally enforceable, it must be "reasonable." Courts evaluate this reasonableness based on three main factors:

• Geographic Scope: The clause must have a limited and clearly defined geographical area. For instance, it might restrict a franchisee from opening a competing business within a certain radius (e.g., 10 or 50 kilometres) of their former franchise location or other existing franchise units. An overly broad area, like an entire province or country, is often deemed unreasonable.

• Time Period: The duration of the restriction must be reasonable and necessary to protect the franchisor's interests. Typical timeframes range from six months to two years after the franchise agreement is terminated or expires. A clause that restricts competition for an excessive number of years is likely to be unenforceable.

• Nature of the Business: The clause must specifically define the type of business activities that are considered competitive. A generic prohibition against "any competing business" is usually too vague. For example, a non-compete for a pizza franchise might restrict the franchisee from "engaging in the sale of pizza and other Italian food items," but not from opening an Amercian steakhouse.

The enforceability of non-competition clauses in franchise agreements varies significantly by jurisdiction and is subject to intense legal scrutiny. Courts often hold these clauses to a stricter standard than those in the sale of a business, as they share similarities with employment contracts, where there is an imbalance of power. If a franchisee violates a valid non-competition clause, the franchisor may seek legal remedies, which could include:

• Injunction: A court order forcing the former franchisee to stop the competing business.

• Monetary Damages: Financial compensation for any revenue losses or harm to the brand caused by the violation.

It is important to note that if a court finds a clause to be unreasonable, it will most often strike it down entirely rather than modify it to be more reasonable. To protect against this being more problematic for the franchisor, the franchise agreement will generally include a severability clause that allows the remainder of the franchise agreement to remain intact even if the non-competition clause is struck down.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

The Basics to Becoming a Franchisee: Embarking on the path of becoming a successful franchisee demands an incredible amount of time and effort, given that there are only a limited number of truly successful franchisees, with those that have set themselves apart and hit the pinnacle of franchise operations and profitability. This begins with understanding the core concepts of a business franchise. Read more.

 

Key Aspects of a Franchise Disclosure Document: A Franchise Disclosure Document is a crucial legal document in Canada that provides a prospective franchisee with essential information about a franchise system. The franchise disclosure document is intended to help the potential franchisee make an informed investment decision. Read more.

 

Key Aspects of a Franchise Agreement: A franchise agreement is a legally binding contract that governs the relationship between a franchisor and a franchisee, which is drafted strongly in favour of the franchisor (as they are in a position to heavily dictate the franchise arrangement that they offer to prospective franchisees). While the specifics can vary, there are several key aspects that are almost always included. Read more.

 

Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.