The interpretation of a post term non-compete obligation on franchise agreements

The European Court of Justice (ECJ) has ruled in case C-117/12, dated February 7th, 2013, on the interpretation of the Vertical Agreements Block Exemption Regulation, in relation to a post term non-compete obligation in a franchise agreement.
 
The non-compete post term obligations in franchise agreements are valid provided they fulfill 4 requirements:
 
a) They refer to goods or services which compete with the goods or services included in the franchise agreement.
 
b) They are limited to the premises and land from which the franchisee has operated during the agreement.
 
c) They are essential for the protection of the technical know-how transferred by the franchisor to the franchisee.
 
d) The duration of the non-compete obligation is limited to one year after the termination of the agreement. 
 
In this case, the question submitted to the ECJ was the meaning of “premises and land”. The ECJ ruled that the common sense and obvious meaning of the words should apply, and therefore “premises” means the part of a building and “land” means a plot or a parcel of land.
 
That is, even though the use of the word “and” could lead to a broader meaning of “premises and land”, the fact is that these words do not mean “territory”, because this word was specifically used in other parts of the Regulation on Vertical Agreements Exemptions, meaning the geographical area where the franchisee could offer goods or services.
 
In practice, this means that the non-compete obligation can not be applied to the territory where the franchisee has been authorized to operate during the franchise agreement, as it was commonly understood before this ECJ ruling.
 
On the opposite, the non-compete obligation should be only applied to the precise premises or plot that the franchisee used during the franchise agreement. Therefore, a franchisee could sell competitive goods or provide competitive services even from the first moment after the termination of the franchise agreement and from premises that are contiguous to that ones occupied by him during the franchise agreement.
 
This could appear as damaging for franchisors, but we must keep in mind that the intention of the European rules is to remove as much as possible barriers to competition among companies, and the exceptions to this general rule that are contained in the Vertical Agreements Block Exemptions should be applied in the most restrictive sense as possible.
 
 
Mercedes Clavell
Lawyer