There have been many litigation cases dealing with the validity of post-contractual non-reaffiliation clauses and the courts have generally tended to examine the extent of the restriction of the franchisee’s freedom of trade implied by such clauses, particularly in terms of their geographical scope and limitation in time. The March 6, 2013 judgment of the Paris Court of Appeal innovates in that it analyzes the lawfulness of those clauses specifically from the competition law and not the commercial law perspective, even if the reasoning adopted is not fundamentally different.
The clause under scrutiny prohibited a franchisee running a grocery store under the Shopi name, for a period of three years from the termination date of the franchise agreement and within a 5 km radius around the store, (i) from using a nationally or regionally known name and (ii) from selling the own-brand products of competing distribution chains. The invalidity of the clause was raised in a proceeding for damages for complicity in the breach of a non-reaffiliation clause, which was brought by the franchisor against a central purchasing agency having made the competing name Coccinelle available to the franchisee and supplied it with Coccinelle own-brand products. The Court of Appeal dismissed the claim for damages, finding that the clause was invalid as both its object and effect were anti-competitive.
The Court of Appeal recalled, as regards the anti-competitive object, that non-affiliation clauses and non-competition clauses are inherent in franchising since they ensure the protection of the transferred know-how but they must remain proportionate to the aim sought. In this case, the Court considered that the clause restricted the franchisee’s freedom of trade in a manner which was disproportionate in terms of the aim sought but also the duration of the restriction. Given the low level of technicality, specificity and originality of know-how in grocery stores, the Court took the view that the clause was not indispensable for the protection of the transferred know-how. The Court also observed that the non-reaffiliation obligation had been devised by the franchisor as a preventive measure to discourage its franchisees from leaving the network prematurely, a purpose which is not related to the protection of the franchisor’s competitive interests. In addition the Court judged that there was no particular technicality in retail food distribution able to justify a reaffiliation prohibition that was to last for three years.
For the anti-competitive effect, the Court found that “this double clause, because of its scope and the generality of its terms, actually prohibits any ex-franchisee, for a period of three years and in the whole of the area concerned, from operating a store similar to the store he operated as a franchisee under economically acceptable conditions”. It concluded that the obligation had effects restricting competition which were comparable to the effects of a non-competition clause.
It is an interesting judgment as it illustrates how competition law can be used as a defense argument against a claim for compensation. The demonstration that the clause was anti-competitive allowed the central purchasing agency to avoid paying damages for complicity in the breach of the non reaffiliation clause.