A: A very common question I get from those who are new to franchising is whether non-compete obligations are typical in franchise agreements. In its most common form, a non-compete obligation will provide that during the term of the franchise agreement, and for a stated period of time after its expiration or termination, the franchisee won’t be involved in a similar business to the one being operated by the franchisee under the franchise agreement.
For example, if the franchisee is operating a janitor business, the non-compete obligation will provide that the franchisee won’t operate, or be employed by, another business that provides janitorial, cleaning, or related services during the term of the franchise agreement and for a period, typically ranging from 12 to 24 months, after the term expires.
The answer to this common question is that virtually all franchise agreements contain some sort of non-compete obligation on the franchisee. This is a typical obligation that’s imposed whether the franchisee operates one franchise or is a large operator of many franchises. Of course, non-compete obligations can also be found in many other types of agreements such as employment agreements and those related to the sale of a business.
For someone new to franchising, non-compete obligations in a franchise agreement can seem somewhat daunting and one-sided. However, a non-compete obligation is an example of one of several provisions in a franchise agreement that need to be considered carefully and in light of the franchise system as a whole and the nature of franchising generally. Someone who is new to franchising must appreciate that sophisticated franchisors need certain provisions in their franchise agreements to protect the franchise system as a whole and the individual franchisees of that system, even if at first glance those provisions only seem to favour the franchisor.
For example, if a franchisee of a particular franchise system starts to compete, through another business, with other franchisees of that franchise system, it’ll hurt both the value of the system as a whole and each individual franchise unit that’s being directly impacted. Given this, a franchisee should be very concerned if a franchise agreement doesn’t contain some sort of non-compete obligation as that means other franchisees of the same system who are signing a similar form of franchise agreement are also not bound by any non-compete obligation. Certainly, most franchisees don’t want to have to be in direct competition with another franchisee in the same system who’s also operating a similar business under another name.
Non-compete obligations have been the subject of a great deal of scrutiny by the courts through the years. Given that they’re a form of a restraint on trade, courts will only enforce a non-compete obligation contained in a franchise agreement if it’s reasonable in all of the circumstances, and in particular:
- Is limited in geographic scope to a well-defined and not overly broad area. For example, non-compete obligations that attempt to restrict the activities of a franchisee throughout all of Canada and the U.S. won’t be enforceable if the franchisor and its other franchisees only operate in one province in Canada;
- Have a definitive period of time during which the franchisee can’t be involved in the competitive activities. This period will typically be throughout the term of the franchise agreement and for a period not to exceed 24 months after the end of the term. Attempts to restrict the activities of a franchisee for many years after the franchise relationship has ended will simply not be enforceable; and
- Must only relate to activities that are actually competitive to the franchisor and its franchisees. For example, a non-compete obligation in a franchise agreement for a restaurant business that attempts to restrict the ability of the franchisee to be involved in unrelated businesses (such as a hair salon) won’t be enforceable.
A well drafted and enforceable non-compete obligation is an essential provision in most franchise agreements. It protects both the interests of the franchisor and each franchisee of that franchise system. Someone who’s new to franchising shouldn’t be surprised or alarmed by the existence of a non-compete obligation in a franchise agreement, but should be mindful that it’s drafted appropriately and is reasonable in the circumstances.
Blair A. Rebane is a partner and national leader of Borden Ladner Gervais LLP’s Franchise and Distribution Group as well as the Vancouver regional leader of the firm’s Auto Industry Group. Blair practices franchise and distribution law and has vast experience in the preparation of all types of franchise, distribution, and dealership contracts. He has appeared as counsel on a large number of franchise and distribution dispute matters and acts for a number of Canada’s most significant franchisors, distributors and manufacturers.
Partner and national leader
Borden Ladner Gervais LLP