Spain – Franchising – Non Competition clauses

Franchise contracts almost always incorporate post-contractual non-competition clauses.

• The Franchisor intends to prevent that, once the contract is over, the Franchisee takes advantage of the “goodwill” generated by the franchised activity becoming an obvious competitor.
• The Franchisee, on the other hand, intends to have his hands as free as possible in order to devote to any activity, whether or not it competes with the business of its former Franchisor.

The natural vocation of the Franchisor is to build these covenants in the widest possible way, both territorially and temporarily, but that attitude easily collides with the non- competition EU regulations.

In 2013, the EU Court of Justice issued (case La Retoucherie / Manuel C) an order answering a question submitted by a Spanish Court that ruled that such restrictions on post-contractual free competition would only be valid if they were preached only with respect to the “premises” in which the terminated franchise contract had been developed, while the prohibition could not extend its effects to the locality (town or city) or to a larger geographical territory (region or country).

On the other hand, the Franchisor usually requires that the franchise agreement is subject to the legislation and the jurisdiction of the country where its headquarters are located, avoiding the legislation and jurisdiction of the courts of the franchisee’s country.

A few months ago the Superior Court of Justice of Madrid issued an interesting ruling on this issue declaring void an arbitration award  by the International Court of Arbitration of the ICC.

• The arbitration award ruled about the contractual relation between a Spanish franchisor and an Argentine franchisee and a post-contractual non-competition clause that prevented the franchisee from performing competitive activities at the end of the contract throughout the territory of Argentina and Uruguay; the contract was subject to Spanish legislation and jurisdiction and, as mentioned above, it was obviously contrary to EU law.
• The arbitration award considered that the aforementioned post-franchise non-competition clause was valid and accordingly ordered the former franchisee to pay the contractually provided penalty.
• The arbitrator’s argument was that the rules of the European treaty on competition are limited to competition in the EU internal market and to trade among the Member States while the conflict judged in the arbitration was a franchise agreement that prohibited post-contract competition on the Argentinian and Uruguayan markets, which are not part of the EU internal market.
• The Superior Court of Justice of Madrid did not share this argument and declared the arbitration decision void; the Judgment argued that Spanish law “ineluctably” incorporates the EU regulations beyond its territorial scope; therefore, if a restrictive agreement is authorized by European law, it must be considered lawful in Spanish domestic law; and vice versa, if the agreement is considered illegal or not authorized by community law, it will not be lawful in our domestic law.
• Consequently, since Spanish law was applicable to the franchise contract in question, the arbitrator should have applied European law, and should have analyzed the non-competition agreement in the light of the European rules no matter if its effects were deployed in non-EU territories.

The relevant conclusion is clear: if the franchise contract is subject to the legislation of an EU country, even if the territory where the franchise deploys its effects is outside the EU, it will be unavoidably subject to the regulations of the EU on competition restrictive agreements.

The European franchisor must then decide if he prefers to submit to the legislation of his country or to the regulations of the country where the franchise is located, perhaps more permissive and less restrictive with respect to these types of agreements.