In the end

When your franchise term comes to an end and it's time to move on, what restrictions lie in your franchise agreement? Legal expert Robert Bedford explains

Most franchise agreements contain measures aiming to restrict ex-franchisees from carrying out a range of activities post termination. These may include ‘non-compete' clauses aimed at preventing ex-franchisees from offering competing services or products, or ‘non-solicitation' clauses restricting their involvement with former customers or employees.

These prohibitions are generally only enforceable insofar as they are reasonably necessary to protect the franchisor's legitimate business interests.

For non-compete restrictions, ‘reasonableness' is often examined in terms of:
1. Activity: is the banned activity sufficiently similar to the business carried on whilst a franchisee?
2. Duration: how long is the party prohibited from carrying out that activity?
3. Area: over what area is the party prohibited from carrying out that activity?

What is ‘reasonable' will vary depending on the nature of the business but, in general, non-compete provisions seeking to cover an area beyond the franchisee's former territory or for a period greater than 12 months may run into difficulties.

However, for non-solicitation clauses, the considerations are different. The key question is likely to be not where a party who has been approached is based, but whether they were previously an ‘employee' or ‘customer' of the business. For this reason, non-solicitation clauses may be enforceable even if the area they cover extends beyond an ex-franchisee's former territory.

The ‘blue pencil'
The Court has also created leeway for itself to provide protection even where, on the face of it, a restriction goes beyond what is reasonably necessary. The Court achieves this through the ‘blue pencil', which permits judges to cross out the offending part of a clause and enforce what remains, so long as the deletion does not affect the rest of the contract.

For example, the following clause would arguably be unenforceable as the area it seeks to cover is too wide:

‘The franchisee shall not, for a period of one year following termination of the franchise agreement, operate any business similar to the business within the territory or the UK.' However, it could be rescued by simply striking through the words ‘or the UK'.

Recent developments
In a recent case before the High Court, the agreement contained both non-compete and non-solicitation clauses. Both sets of restrictions sought to prohibit the relevant behaviour throughout the ‘restricted area' , which was defined as ‘the territory, the territory (in the UK) of any other franchisee... and any other territory (in the UK) covered (in relation to the supply of products) by the franchisor.'

It was agreed between the parties that non-compete restrictions covering the restricted area were too wide to be considered reasonable or enforceable. The franchisor maintained that those clauses could be rescued by editing the definition of restricted area so that it referred only to the territory.

Unfortunately for the franchisor, amending the definition of restricted area would have had the effect of changing the area covered by the non-solicitation clauses, where the larger region was not problematic.

The judge ruled that this would result in unnecessarily amending the remaining part of the contract and therefore the blue pencil could not be applied and the non-compete provisions were void.

Considerations for franchisors
When evaluating whether a restriction is reasonable, franchisors and their representatives should give careful consideration not only to the nature of the business involved but also the type of protection sought under each individual clause. Limits on duration or area appropriate for one clause may be considered excessive for another.

Franchisors can also give themselves a second bite at the cherry by structuring clauses so that it is easier for a judge who does not like the whole section, to strike out parts whilst retaining some measure of protection.

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