Franchise Non-Compete Clauses: How Franchisors Can Avoid Litigation!

Non-compete clauses are one of the most common subjects of litigation in franchising. But the cost of litigation can be prohibitive, and the outcome uncertain. In her latest blog, Roz Goldstein sets out some tips for franchisors on how to protect their businesses effectively.

The story is all too common: The franchisee benefits from the set-up, training and initial support from their franchisor, and then sooner or later, with ideas of saving themselves the cost of ongoing franchise fees, they abandon the franchise and set up a competing business of their own.

You should have confidence that, if drafted by a BFA-affiliated lawyer, your agreement will contain carefully and precisely drafted non-compete obligations, which apply to the franchisee both during the term of the franchise and for a period (12 months, for example) after termination.

So it is well worth getting your franchise agreement checked. That gives you the upper hand – in theory. But unfortunately, the practical reality may be different. The enforcement of non-compete clauses in English courts is largely dependent on a Judge’s subjective view. Non-compete clauses are “void” if they are drafted wider than they need to be to protect a franchisor’s proprietary interests.

Even assuming you get a court judgment in your favour, it doesn’t mean that a cheque from the franchisee for damages and your legal costs will magically arrive in the next post. If the franchisee has no assets and no funds, then you may end up substantially out of pocket.

Ignoring the problem is hardly a solution either, as it can send a message to franchisees that their franchisor is a push-over. What practical steps can a franchisor take to reduce their risks? As Roz Goldstein points out, the solutions often lie not in legal drafting, but in your business strategy:

1. Branding is everything. People invest in, and stay in, franchise systems which have strong brand recognition. Investing in proper trade mark protection, and having a budget for PR and brand management, are key. Franchisors who have less frequent trouble with “rogue” franchisees tend (in very general terms) to be the ones where brand recognition is critical to customers’ reason to buy.
2. Ongoing franchisor support. Your business plan should plan for resources and budget to provide meaningful value to franchisees throughout the term of their franchise. A comprehensive and competitive supply chain is one good example. Likewise, an ongoing flow of customer leads, for example through website marketing.   Customer service and systems support can also be key, particularly where they provide meaningful value.
3. Control of the client database – For businesses that rely on ongoing customer relationships, if the CRM system works well, and is easy to use, your franchisees are far less likely to be storing data elsewhere, and if need arises you can at any time switch off your franchisee’s access to data.

The need for a strong legal agreement is key. But relying on that alone is a high risk strategy. The more you can build the above practical steps into your business model, the greater your chances of growing and maintaining a successful franchise network.