Non-compete clauses in franchise agreements

drain doctorIn business sale agreements, you might be able to enforce a 2 year non-compete clause (also known as a restrictive covenant). In employment contracts, you might be lucky to enforce a 6-month clause. Of course it all depends on the facts and the detail of the clause. Some clauses are very poorly drafted, as they seek to incorporate dicta from previous cases, rather than setting out the provision clearly and concisely.

Where in this complex picture do franchise agreements lie? Should you treat them as purely business-to-business contracts, where longer periods of post-termination restriction are enforceable? Isn’t the reality that some franchisees are barely in the category of business people, and have many of the features of consumers or employees? After all, the very nature of a franchise agreement is that the franchisee can follow the business formula set by the franchisor, rather than having to create a business from scratch. Accordingly, shouldn’t the law protect them in a similar way to consumers?

In some countries (e.g. Australia, but not the UK) there are special laws governing franchise agreements, which give a degree of protection to the franchisee. In the absence of such laws, how should the law treat non-compete clauses in franchise agreements?

Some answers are given in the recent, English Court of Appeal case, Dwyer (UK Franchising) Ltd v Fredbar Ltd & Anor (Rev1) [2022] EWCA Civ 889 (30 June 2022).

The case concerned the restrictions in a franchise agreement between the creators of the Drain Doctor franchise, and their franchisee in Cardiff, a Mr Shaun Bartlett. According to the lead judgment of Chancellor Flaux, the claimant considered that Mr Bartlett:

required more support and hand-holding than any other franchisee in getting set up, including help with quite simple tasks … he struck [him] as someone who was overactive and tended to be easily agitated … he was needy, prone to agitation and had had difficulty in building relationships, including [subsequently] with customers

IP Draughts considers that this shows that Mr Bartlett was more like a consumer than a businessman. This wasn’t exactly the line of reasoning adopted by the court, but it may amount to the same thing. The court considered factors such as the inequality of bargaining power, when deciding that a 12 month non-compete clause was unenforceable.

The court was keen to emphasise that the 12 month clause in the Drain Doctor franchise agreement might be enforceable with different facts, such as a different franchisee.

IP Draughts was particularly struck by comments from Arnold LJ in this case, some of which are astute and some of which seem unrealistic. While agreeing with the Chancellor’s reasons for not upholding the clause, he added the following remarks:

There is no dispute that Dwyer was entitled to protect the goodwill of the business upon termination of a franchise by a post-termination restrictive covenant which did not exceed what was reasonably required for that purpose. One can well understand the desire of a franchisor like Dwyer to have a standard form of franchise agreement, including a standard form of post-termination restrictive covenant.

It is inescapable, however, that not all potential franchisees are equal. Some potential franchisees have more bargaining power, are less likely to fail as franchisees and are more likely to be able to survive the consequences of failure than others. Mr Bartlett had little bargaining power, was more likely to fail than to succeed, particularly in the short term, and was at risk of financial disaster if he failed. Accordingly, in his case, the relationship with Dwyer was closer to an employment contract than to a sale of a business.

If it were the law that inequality of bargaining power was irrelevant to the reasonableness of a post-termination restrictive covenant, then some of Dwyer’s criticisms of the judge’s reasoning would have substance. But that is not the law. Given that inequality of bargaining power is not merely relevant but significant, a franchisor in the position of Dwyer must proceed accordingly.

Dwyer did not have to take on Mr Bartlett (acting through Fredbar Ltd) as a franchisee. Even if it did, it did not have to impose its standard form of agreement upon him. Even if it wanted to impose a standard form of agreement, it did not have to have a “one-size-fits-all” restrictive covenant. For example, as the judge noted, it would have been perfectly possible to have a covenant the duration of which depended on how long the franchise agreement had subsisted prior to termination. The longer it had subsisted, the greater the goodwill that would have been expected to have been built up during the currency of the agreement and the longer the period of protection that would have been justified.

Of course, the practical reality is that a franchisor is not likely to tailor a non-compete clause to the circumstances of the individual franchisee. That is a thankless task where one is trying to predict the sympathy of the court. The franchisor is probably going to want a standard clause that works in the majority of cases. Unfortunately for Dwyer, this is the minority case where the clause doesn’t work. Despite the court’s comments about their decision being based on the facts, franchisees may take the view that the clause has been shown to be unenforceable and may be more likely to challenge or ignore it, as a consequence.

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One response to “Non-compete clauses in franchise agreements

  1. Interesting article. The way that drain doctor/dwyer advertise the franchise opportunity I must admit I did feel like a consumer purchasing a ready made business which was far from the case.

    In a word I felt duped by their entire sales process and I know that I’m far from the only one.

    There are a lot of things that drain doctor/neighbourly (holding company) were underhand about:

    They over inflated the finance opportunities as the judge in the high court found in his judgement.
    The projections given were inaccurate
    There was no national account work as advertised
    The brand name drain doctor had no goodwill in Cardiff due to the lack of anyone trading in the area (none of which was explained when selling the franchise)
    The 100 page agreement was sent just 24 hours before the salesman asked for it to be signed on a take it or leave it basis
    They had two repudiatory breaches one in misusing the marketing fund. The other which was the main driving force behind my unlawful termination was that they would not enact force majeure during Covid when my son was vulnerable as declared by the government due to a disease he had contracted two years prior to the virus

    I could go on. I naively thought that by giving a £35,000 fee for drain doctors franchise in Cardiff and weekly fees of around £500 a week would actually contribute to them doing something to help the franchise succeed (like winning national accounts). I was not aware that I was basically paying drain doctor money to grow their brand in Cardiff as I could do as an independent operator away from a franchise. I agree that I definitely had too much of a consumer mindset as I thought that the money given to the franchisor would result in getting something back, if I’d been more business minded maybe I could see how one sided the 100 agreement and relationship was between franchisee and franchisor

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