• Global Franchise News: Preventing Competition by Former Franchisees
  • May 8, 2014
  • Law Firm: Dentons Canada LLP - Toronto Office
  • Most franchise agreements prevent the franchisee from competing with the franchisor for a certain period of time after termination. In Europe this is typically one year. In addition the franchisee can be prevented from using the trade mark of the franchisor for as long as the trade mark remains the registered property of the franchisor. Some countries provide additional protection to the franchisor based on unfair competition and passing of legislation.

    Where are the limits?
    In Germany a group of former SUBWAY franchisees now operates sandwich shops under the name "Fresh". They sell the same product range as before and continue to use the same furniture and store layout. The colour scheme has been changed and the SUBWAY name and trade mark are no longer used. SUBWAY issued court proceedings against these franchisees on the basis of Germany's unfair competition laws. The claim was that the franchisees were "guilty of passing off" and that they were pretending to be SUBWAY. To succeed with a passing off claim the franchisor needed to show that customers were misled into thinking that "Fresh" sandwich shops were affiliated with SUBWAY. However, the change of the colour scheme and branding was, in the view of the German courts, sufficient to ensure that customers were not misled. Despite the fact that the products sold were identical, SUBWAY did not have a monopoly on the "sub" style of sandwich and the new name made it clear that the "Fresh" group was not part of SUBWAY.

    A balance has to be found between the interests of the franchisor to protect its confidential knowhow and business system on the one hand and the interests of the franchisees to continue working in their learned profession after termination or expiry of the franchise agreement on the other hand. Here SUBWAY was protected from competition by former franchisees for a period of one year. After that period had expired the franchisees were permitted to compete with SUBWAY in the sandwich business. They could not be forced to buy new furniture and move to a new store. A change in the colour scheme used and the name was sufficient to distinguish their new business from the SUBWAY brand.

    How can franchisors protect themselves further?
    To protect themselves further against creative former franchisees such as the "Fresh" group, franchisors should consider additional contractual protection such as:

    • inserting a step-in right into the contract to enable them to take over the lease and
    • negotiating a buy-back option to acquire the furniture and typical equipment from the Franchisee.