Or you might just concentrate on beefing up other contractual provisions that might be easier to enforce, such as non-solicitation provisions that prevent the ex-franchisee from soliciting former customers or former employees. You could beef up your confidentiality and trade secret provisions so the ex-franchisee has to significantly alter its business practices or risk breaching these provisions. You might try to contractually ensure that on termination or expiration of the franchise agreement, the franchisor can force the franchisee to assign its telephone number into the franchisor's name, forcing the franchisee to get a new one, at some inconvenience. And you could include an “option to purchase” in the franchise agreement permitting you to buy back all the ex-franchise's business assets for fair market value, forcing the ex-franchisee to buy new business assets at full price while you get all his for a song.
And if you have the lease in your name and sublet the premises to the franchisee, then you have more control over where the ex-franchisee can operate because you're his landlord under the sublease. If you don’t, a conditional assignment of the lease might allow the franchisor to take over the lease on expiration or termination of the franchise, as long as the landlord is on side.
If the ex-franchisee is breaching its contract and leaving the franchise system before the term ends, you might make use of all of the points noted above (i,f of course, you've drafted them into your contract), but instead of trying to enforce a non-competition covenant, your agreement might have a provision whereby damages are estimated based on a formula such as what the franchisor would have received in royalties per month had the franchisee not breached prematurely. If those royalties totalled $10,000 a month, the franchisee might think twice before bolting, as it may be easier for you to enforce a monetary damage claim against a renegade franchisee than a non-competition clause.
A couple of other points to think about. First, it may be easier to enforce a non-competition clause when the party trying to enforce it actually paid to keep the other side out of the business for a while. This happens regularly when a purchaser buys an existing business, but doesn’t want the vendor or the vendor's owners to set up shop across the street under a new name, and take away the business and the customers the purchaser thought it was buying. In vendor-purchaser deals, you'll often see a payment of part of the purchase price allocated to the corporate vendor and its principals as a payment for their non-competition.
But the provision still has to be reasonable in the circumstances.
Second, the comments above are general and your facts may differ, so see a lawyer if you have questions about the enforceability of a covenant you've signed, or are about to sign. This is a newspaper column, not a legal opinion.
Special to the Globe and Mail
Vancouver franchise lawyer Tony Wilson is the author of Buying A Franchise In Canada – Understanding and Negotiating Your Franchise Agreement and he is ranked as a leading Canadian franchise lawyer by LEXPERT. He is head of the Franchise Law Group at Boughton Law Corp. in Vancouver and acts for both franchisors and franchisees across Canada, many of whom are in the food services and hospitality industry. He is a registered Trademark Agent, an Adjunct Professor at Simon Fraser University and he also writes for Bartalk and Canadian Lawyer magazines.