An essential risk management strategy to consider when franchising your business is how you will prevent a franchisee from taking everything they have learned from you, including your intellectual property, marketing techniques, trade secrets, and customers, and opening up a business of their own to compete with yours. Protection comes in the form of a restrictive covenant or non-compete clause. There have been many court battles over the years concerning the enforceability of franchise non-compete clauses. And given that franchise disputes are a) expensive and b) stressful, as a franchisor, the last thing you want is to join this type of group.

What is a franchise non-compete clause?

A non-compete clause is a clause in the Franchise Agreement that prohibits a franchisee from using the knowledge and expertise that they have acquired from the franchisor to set up in competition with them or solicit the franchisor’s customers.

Are non-compete clauses enforceable?

This has always been a tricky point, and it is why it is so important to have an experienced Solicitor review your franchise’s risks and draft your Franchise Agreement, including a non-compete clause.

As a matter of public policy, any type of covenant designed to restrain a person from trading or being able to make a living is unenforceable. But if you, the franchisor, can show that the clause is reasonable, the Courts are likely to enforce it. To qualify as reasonable, the restraint must:

1. serve to protect a legitimate interest of the franchisor;
2. be reasonable to protect that interest, in that it must be:

i) for a reasonable duration only;

ii) comprise of a reasonable geographic location; and

iii)cover only those activities which are reasonably necessary.

 In Pirtek (UK) Ltd v Joinplace Ltd (t/a Pirktek Darlington) and others [2010] EWHC 164, the non-compete clause imposed a one year post-termination restriction on the franchisee working in a similar or competing business. The High Court concluded the restriction was necessary to mitigate the risk that the knowledge and help provided by the franchisor to the franchisee would, after termination, be used to benefit the franchisor’s competitors.

When deciding whether the restraint was reasonable, Justice Briggs (now Lord Briggs of Westbourne) commented:

“In my judgment the level of know-how and assistance provided by Pirtek (UK) to its franchisees and to Joinplace in particular, amply justified a post-termination restraint on competition for the purpose of protecting Pirtek (UK) against the risk that it might be used by competitors. I have already summarised the nature of that training and assistance in my findings of fact. It extended to technical assistance (both to principals and staff), business management assistance, including in particular the expensive and sophisticated IT system and, in the form of the Operating Manual, included a comprehensive description of the way in which to run a business which would be attractive to customers.” 

Will restraints that last only 12 months always be enforceable?

Unfortunately, the law does not provide for such an easy, cut and dry principle. In Dwyer (UK Franchising) Ltd v Fredbar Ltd [2022] EWCA Civ 889, the Court of Appeal held that there is no general rule that a 12-month post-termination restrictive covenant will be enforceable in a franchise agreement. The specific circumstances of this case meant the 12 month restriction, although short, was unreasonable. The Court also ruled that when deciding whether a non-compete clause was reasonable, it was entitled to consider the level of risk taken by the franchisee and their personal circumstances. If there was a significant imbalance of negotiating power between the franchisor and the franchisee, the Franchise Agreement could be more akin to an Employment Contract than a contract for the sale of a business. In Dwyer, the franchisor was the largest plumbing and drainage business in the country. The franchisee had no previous experience in plumbing and had invested all his savings in the franchise, in addition to taking out a bank loan. The franchisor presented the franchisee with a take it or leave it Franchise Agreement. The factual circumstances of the case led the Court to deem the restraint unenforceable. However, in giving the judgment, Sir Julian Flaux, Chancellor of the High Court, went on to say:

“I should emphasise that, like the judge, I have concluded the restrictions are unenforceable on the facts of the case. It does not follow that the 12 month restriction would be unreasonable in every Dwyer franchise agreement. Where a franchisee was well-established and successful or where Dwyer could show cogent evidence of the need to protect its goodwill, a court might well conclude that the restriction was reasonable.”

Summing up

Our expert Franchise Law Solicitors have the knowledge and resources to draft a comprehensive Franchise Agreement bespoke to your business and market sector. We can include a non-compete clause that is fair and reasonable and has the best chance of being upheld if it is challenged. We also advise and represent franchisees in dispute with their franchisor over a non-compete clause.

To find out more about any matters discussed in this article, please email us at [email protected] or phone 0121 249 2400.

The content of this article is for general information only.  It is not, and should not be taken as, legal advice.  If you require any further information in relation to this article, please contact 43Legal.

“Melissa Danks is the founder of 43Legal. She has over 20 years’ experience as a solicitor working within the legal sector dealing with issues relating to risk management, dispute resolution, and advising in-house counsel in SMEs and large companies. Melissa has extensive expertise in providing practical, valuable, modern legal advice on large commercial projects, joint ventures, data protection and GDPR compliance, franchises, and commercial contracts. She has worked with stakeholders in multiple market sectors, including IT, legal, manufacturing, retail, hospitality, logistics and construction. When not providing legal advice and growing her law firm, Melissa spends her time running, walking in the countryside, reading and enjoying downtime with close friends and family.”