Post-termination restrictive covenants upheld Pirtek (UK) v Joinplace
14 July 2010
In a judgment published on 7 July, the High Court upheld a
franchisor’s (Pirtek’s) ability to restrain its former franchisee
from opening up a competing business for a period of one year
following termination of the franchise agreement. The Court held
that the restraint in question was necessary to protect the
know-how provided to the franchisee during the currency of the
agreement.
This ruling is an application of the classic Pronuptia
judgment which provides the basis for the enforceability under EU
and UK competition law of many common restrictions in franchise
agreements. One of the key findings in Pronuptia is that
non-compete obligations on the franchisee - even reasonably
time-limited post-term non-competes - do not risk falling
foul of competition law to the extent that they are necessary for
protecting the franchisor’s know-how.
In applying this principle the Court in Pirtek
addressed a number of important issues which may be helpful for
franchisors wishing to enforce this kind of restraint:
- The Pirtek franchisee/defendant argued that the restriction was
not necessary because he claimed that the franchisor’s
know-how was no more that general business techniques, not specific
to the franchisor’s way of business, which he, as an experienced
businessman was familiar with anyway. The Court rejected this,
pointing to the extensive training and technical assistance
provided to franchisees and their staff, the expensive IT system
provided to franchisees, and the Operating Manual which described
how to run a business in a way that would be attractive to
customers.
- The Court also considered whether a general prohibition on
carrying on a competing or similar business was too wide and
concluded that it was not. It held that, once it had been
established that the know-how provided by the franchisor was of the
extent and type likely to turn the franchisee into a competitor, it
was not necessary to conduct a minute assessment of whether it
might be possible to run a competing business without relying on
that know-how.
Both findings usefully support standard practice in franchising
agreements. Beware though of the territorial extent of any
non-compete obligation. Whilst the Court upheld the restraint in
relation to the geographic territory covered by the former
franchise agreement (County Durham), it considered that a
nationwide restraint would, in this case, be more extensive than
justified.