It’s common for a franchise agreement to contain a non-compete obligation of some form. These are typically designed to ensure that the franchisee doesn’t become involved with a similar business within a designated timeframe and geographical area relative to their relationship with the franchise.
Franchisees can review the particulars of their own non-compete clauses to understand the exact parameters they’ve agreed to, but you may still be wondering how real-life court cases have transpired.
A case study
The following is a discussion about a recent case from the Alberta courts related to the enforceability of non-compete provisions in a franchise agreement.[1] The court held a stricter standard for obtaining an injunction in the case of franchise agreements. The case involved a hair salon franchise.
The hair salon franchise entered into its standard franchise agreement with a franchisee, which contained a standard non-compete clause. Years later, Larko sold her franchise location and opened a competing business within the restricted territory of the non-compete provision. When the hair salon franchise found out that the competing business was opening at the location, it filed an injunction application to restrain the defendants from operating a sale business within the restricted territory. The salon brand did this to protect the existing franchisee who had purchased the business.
Injunction framework
Courts typically apply the following three-part test when deciding whether to grant interlocutory injunctions:
- Is there a serious issue to be tried?
- Will the applicant suffer irreparable harm if the injunction is not granted?
- Does the balance of convenience favour granting or denying the injunction?
In certain circumstances, an applicant may have to establish a strong prima facie case at the first stage of the analysis. The strong prima facie case standard is more challenging to establish and is often utilized when a court is dealing with injunctions that seek to enforce restrictive covenants in franchise agreements, such as non-compete clauses.
The parties in this particular case agreed that the strong prima facie case standard was applicable.
1) Strong prima facie case
In addressing whether a strong prima facie case existed at the first stage of the analysis, the Court considered:
- The ambiguity of the non-compete clause
The Court found the non-compete clause unambiguous. No ambiguity existed with respect to its duration or geographic scope and the business and time to measure the business was not ambiguous. Further, the Court found the language prohibiting businesses that were the “same as,” “directly competitive with,” and “similar to” the original franchise.
- The engagement of the non-compete clause
The franchisor in this case successfully established that the defendants were acting in a manner prohibited by the non-compete clause.
- The interest of the plaintiff
The franchisor was unable to establish that it had a proprietary or legitimate interest to protect via the non-compete clause. The Court held that the brand’s goal was to restrain competition in an area in which it had no interest in order to protect future or existing salons, and not to protect the existing franchise.
Upon this finding, the Court held that the franchisor had not established a strong prima facie case.
- The reasonableness of the non-compete clause
The franchisor was unable to establish that the non-compete clause would be found to be reasonable and enforceable. The Court applied a more stringent framework due to the imbalance of bargaining power and the fact that the franchise agreement was a non-negotiable contract of adhesion. The more stringent framework was applied even though the franchisee was an experienced franchisee and had the benefit of legal counsel when executing the franchise agreement. The Court also considered the fact that the franchisee was personally bound by the franchise agreement and would be significantly restricted if the non-compete clause was enforced against her.
Finally, the geographic scope outlined in the non-compete clause was found to be broader than what was reasonable to protect the existing franchise.
2) Irreparable harm
The Court found no evidence of real or “threatened” harm to the franchise system or to its goodwill with its franchisees.
3) Balance of convenience
A balance of convenience analysis was unnecessary as the franchisor was unsuccessful on the prima facie case and irreparable harm branches of the three-part test.
The injunction application was dismissed.
Implications
When signing a franchise agreement, be sure to carefully note and make sure you understand the bounds of a franchisor’s non-compete clause. Franchisors need to be mindful when preparing standard form franchise agreements of the reasonableness (geographic scope and time period) of non-compete provisions in franchise agreements. Courts will view the typical imbalance of power that exists between franchisors and franchisees, and err on the side of favouring the franchisee. Courts will not enforce a non-compete provision where the scope exceeds what is necessary to protect an existing franchisee.
Heather Barnhouse
Partner
Dentons LLP
heather.barnhouse@dentons.com
[1] Chatters Limited Partnership v Chatters Deerfoot Meadows Limited, 2025 ABKB 536