News

Recently, the Arnhem-Leeuwarden Court of Appeal mitigated the contractual fine of a former franchisee due to its breach of a non-compete and confidentiality clause, https://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:GHARL:2024:2397.

The court followed the earlier opinion of the court of Gelderland, which had also already mitigated the fine based on (among other things) the forced lockdown by corona, https://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:RBGEL:2022:2364.

The case

The case involved a football merchandise franchise (“100% Football” and with effect from April 2021 “11Teamsports”). The franchisee operated a football merchandise shop under the franchisor’s brand and, as part of an envisaged merger, the franchisor wanted all franchisees to sign a new franchise agreement. The franchisee refused to do so. Due to this, the franchisor did no longer allow the franchisee to purchase products jointly (at a discount) from the regular supplier. Subsequently, the franchisor informed the franchisee that it terminated the agreement, but the franchisee did not accept this.

The franchisee continued the exploitation of its store under a competing brand during the last months of the franchise agreement with franchisor. During that period, the store had to close for weeks due to a corona lockdown. The franchisee also purchased its products from the supplier of the competing brand and it shared information about its former purchase prices with its new supplier. The former franchisor initially claimed (among other things) € 90,000 in forfeited fines based on breach of non-competition and confidentiality obligations

Both the court and the court of appeal ruled that franchisee had indeed breached its obligations. The franchisee communicated (including on social media) to the market that it was continuing under the name of a competitor of the franchisor. The court ruled that franchisee thereby breached the non-compete obligation. Regarding the sharing of purchase prices with the new supplier (and competitor), the court considered:

“If anything in the franchise agreement is confidential, it is the franchisees’ purchase prices and discounts. After all, it is mainly on these that the franchise formula bases its success in its constant (price) competition with other chains operating a similar system in the same industry.”

The court considered this in breach of the duty of confidentiality. Regarding the nature of the agreement and the circumstances under which the fine was invoked, the court considered:

“The franchise relationship is in some sense intrinsically unequal”(…). In this case too, there was a certain dominance of the franchisor. (…) The franchisees were dependent on the store for their income and were also affected by the lockdown. (…) They gradually (…) towards the expiry of the franchise agreement increasingly branded themselves with Voetbalshop [competitor]. That generates competition and franchisees should naturally have maintained secrecy about pricing too. But on the way to Football Retail’s forced exit from the franchise agreement, those breaches of franchise confidentiality weigh less heavily.”

In addition to the considerations mentioned above, the court of appeal states that the franchisor suffered limited damages because the franchise organisation did switch to a new formula soon afterwards. The court moderates the fine for the infringement due to the breach of the non-compete clause to a total of € 5,000.-.

For the breach by violation of the confidentiality obligation, the court moderates the fine to € 5,000.- for the first time and € 1,000.- per violation for the eight violations that followed.  A substantial mitigation, therefore, with the court taking strong account of the situation in which the franchisee found itself (shortly after the corona crisis).

The court of appeal’s mitigation of the fine is in line with Supreme Court case law. The court’s judgment does contain a number of considerations relevant to (franchise) practice that parties may take into account when including or claiming a fine. This applies to all types of commercial contracts and not just franchise agreements.