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Restraint Clauses in Franchise Agreements: Fairness is often in the detail

Catherine Sedgley

For anyone looking at entering a franchise agreement, it is important they locate the restraint of trade (or non-compete clause) within the franchise agreement and consider the impact it could have on their future career prospects and opportunities. The consequences of a restraint of trade or non-compete clause will often not be realised until the franchisee wishes to exit the network or nears the end of its term. Prospective franchisees should fully consider the possible impacts of the restraint of trade or non-compete clause on their future plans, both professionally and personally.

The Australian Competition and Consumer Commission (ACCC) has recently accepted a court enforceable undertaking by franchisor, Back In Motion Physiotherapy Pty Ltd, to remove terms from its franchise agreements relating to a restraint of trade (by the franchisee in favour of the franchisor) and a “buy out” fee which it admitted were “unfair” as defined by the Australian Consumer Law.

A restraint of trade clause, which may also be known as a “non-compete clause”, is a common inclusion by a franchisor in a franchise agreement and places certain restrictions on a franchisee upon termination or expiration of the franchise agreement from being involved in a competing business located within a prescribed geographical area and for a specified period of time. As a standard inclusion in a franchise agreement, franchisees often overlook this clause and fail to appreciate the significant consequences it could impose.

In the case of Back In Motion Physiotherapy, any franchisee wishing to leave the franchise network was not allowed to be involved in any competing practice located within a radius of up to 10 kilometres of any other Back In Motion Physiotherapy franchise for up to a period of 12 months. For health professionals, such as physiotherapists, such a restraint could pose a significant impediment to their career prospects and opportunities. Effectively, the restraint clause in the Back In Motion franchisee agreement meant that most former franchisees could not operate in many parts of metropolitan areas of Australia because of the existence of other Back In Motion Physiotherapy franchises in those locations, which would be highly detrimental to franchisees seeking an exit for their franchise agreement.

The Back In Motion Physiotherapy franchise agreement also included a clause in which the franchisor could charge a departing franchisee a “buy-out” fee equal to four times their annual royalty fees if they opted to be released from the restraint of trade clause. 

Back In Motion Physiotherapy have used the same standard franchisee agreement for more than 15 years and admitted that these terms may be “unfair” as defined by the Australian Consumer Law.

After being contacted by the ACCC, Back in Motion Physiotherapy has undertaken not to enforce the restraint of trade and “buy-out” fee terms in the future or against franchisees who have left the franchise network in the past 12 months.  It also undertook not to include these terms in future franchisee agreements. Back In Motion Physiotherapy have also undertaken to inform all affected franchisees including those who left the franchise network within the past 12 months that these terms will not be enforced.

If you have a query relating to any of the information in this article, or you would like to speak with an experienced franchising lawyer regarding your own franchising matter, please don't hesitate to get in touch with a member of Coleman Greig's Franchising team, who would be more than happy to assist you.