With the Chartered Professional Accountants of Canada...
Franchise agreements have terms that can be as short as 5 years. When the franchise ends what can a franchisee do? Can the franchisee use the expertise, experience and relationships gained over the course of their franchise? The focus of this article will be on non-compete clauses. Before embarking on a discussion of non-compete clauses, some mention should be made of the franchisee’s premises and the impact the premises may have on the franchisee’s wishes. In some instances the premises will be irrelevant, because the lease ends at the same time as the franchise or the franchisor takes over the location, but it is possible that a franchise will still be responsible for its lease. Where a lease and a franchise do not end at the same time and the franchisor does not become the tenant, it is important for the franchisee to understand what it can do after the end of the franchise.
Most franchise agreements contain a non-competition clause that prohibits the franchisee from carrying on a competing business for a fixed period of time after the end of the franchise.
Courts, in determining whether or not to enforce a non-competition covenant, balance maintaining free and open competition and a disinclination to restrict the right, especially between knowledgeable persons of equal bargaining power. As a result of these competing themes courts often do not enforce a non-competition covenant against an employee, where a non-solicitation covenant will protect an employer. Will a franchisee be seen more like an employee with the weaker bargaining power and not being paid for goodwill, or more like the seller of a business, since the franchisee is effectively returning the business? Courts will enforce non- competition clauses against franchisees.
Even though a franchisee is subject to non-competition covenants, the following should be considered:
When a franchisee and franchisor agreement comes to an end the franchisee must be aware of the clauses that could potentially harm future businesses. Something that might seem very different could potentially fit under the non-competition clause since the agreement is so general. Double-check and be cautious before entering a new business that might seem somewhat similar to the past franchised business.