Post-term non-compete clauses in franchise agreements becoming more challenging to enforce

Introduction
Non-compete clauses under Macron Act
Elephant Bleu decision
Practical implications

Introduction

As far as post-term non-compete clauses are concerned, one generally looks at the block exemption criteria set out in Article 5(3) of the EU Block Exemption Regulation (330/2010) (including the limitation on the premises and land from which the franchisee operates during the contract period and the one-year limitation). If these conditions are not fulfilled, the clause may not benefit from the block exemption. However, to determine whether a non-compete undertaking is enforceable, the courts apply the general conditions required for the validity of non-compete clauses under French law – namely, it must be:

• limited in time and geographic scope;
• justified to protect the franchisor's interests; and
• proportionate to those interests.

Despite some franchisees' attempts to include another condition that applies to employment contracts (ie, the need for the non-compete clause to include financial compensation), to date, the French courts have resisted making this addition. In practice, this means that non-compete clauses are often enforced in France if they meet the above general requirements. Moreover, the French courts tend to differentiate between:

• traditional non-compete clauses (the object of which is to prohibit the conduct of a business similar to that of the franchise network); and
• non-reaffiliation clauses (which simply restrict the franchisee's freedom to join a competing franchise network).

As non-reaffiliation clauses are less restrictive for franchisees than non-compete clauses, they are more widely admitted in the courts, except in sectors where belonging to a network is decisive given the market's structure (eg, the food retail or car rental sectors).

This traditionally favourable approach to post-term non-compete clauses in franchise agreements was overturned by the Macron Act of 6 August 2015 in relation to retail businesses.

Non-compete clauses under Macron Act

Article L341-2 of the Commercial Code (introduced by the Macron Act) sets out the principle under which any clause seeking to prevent competition by a franchisee further to the termination of the franchise agreement is null and void. Such principle can be overcome if the four cumulative conditions set out in the EU Block Exemption Regulation are met – namely:

• the restriction relates to goods or services which compete with those covered by the franchise agreement;
• the restriction concerns the premises from which the franchisee operated its business during the franchise agreement;
• the restriction is indispensable to the protection of substantial, specific and secret know-how transmitted by the franchisor; and
• the restriction's duration does not exceed one year after the franchise agreement's term or termination.

Thus, while non-compete clauses remain subject to the traditional general criteria concerning most businesses as developed by case law, when it comes to retail, they must fulfil the specific conditions of Article L341-2.

Elephant Bleu decision

A recent Paris Court of Appeal decision provides an interesting illustration of this new provision in the retail sector.(1) The case concerned the Elephant Bleu car wash franchise.

The franchise agreement included a post-term clause preventing the franchisee from using the blue and white colours and ordering it to repaint its car wash centre within six months of the end of the agreement. Several years after the agreement's expiry, the franchisee, which intended to join a competing franchise that used the same colours, requested the clause to be held null and void in accordance with the abovementioned Article L341-2 of the Commercial Code. The franchisee contended that the prohibition on using the blue and white colours was not limited in time and therefore restricted its freedom to trade by preventing it from joining a competing network which used the same colours.

The Paris Court of Appeal ruled in favour of the franchisee. It observed that other car wash chains used white (a symbol of cleanliness) and blue (a symbol of water), and that these colours were easily associated with car washing. It held that the abovementioned clause constituted an open-ended restriction to compete.

The court observed that the new provision had entered into force on 6 August 2016 (ie, one year after its adoption pursuant to the final provisions of the Macron Act) and applied to the relevant non-compete clause despite the fact that the franchise agreement had been terminated approximately 10 years before. This was because the ban on using the blue and white colours was still in force when the Macron Act came into force. This case is an interesting example of the application of the law over time.

Practical implications

Franchisors should be aware that post-contractual non-compete clauses will be more difficult to enforce if they exceed the limitations in the EU Block Exemption Regulation allowed for retail businesses – in particular, if the territorial scope of the clause is wider than the trading area around the franchised outlet or its duration is longer than one year. Moreover, restrictions such as a ban on using some non-distinctive signs will be deemed non-compete clauses, therefore falling within the same limitations.

For further information on this topic please contact Raphael Mellerio at Aramis Law Firm by telephone (+33 1 53 30 7700) or email (mellerio@aramis-law.com). The Aramis Law Firm website can be accessed at www.aramis-law.com.

Endnotes

(1) Paris Court of Appeal, Division 5, Chamber 4, 1 July 2020, 17/21498.