Non-Compete And Step-In Clauses: High Court Carewatch Case Confirms Their Validity

Recently, the English High Court handed down its judgment in the carefully-watched Carewatch case 1

The case considered the validity of the non-compete and step-in clauses in a franchise agreement which a franchisor had sought to enforce against its former franchisee.

The High Court confirmed that the leading case at the Court of Justice of the European Union (CJEU) on non-compete provisions in a franchise agreement, Pronuptia2, remains good law. Franchisors will be relieved that the position has not changed and so post-termination non-compete clauses in a franchise agreement (which restrict competition) will be valid if they are necessary to protect the franchisor's legitimate business interests.

The step-in provisions in the Carewatch agreement had entitled the franchisor to operate the franchised business on termination from the premises and to buy certain franchisee assets. The High Court commented that they were not "particularly stringent or onerous"3 and they were upheld. However, the franchisor did not have a right to buy the franchised premises from the franchisee as the agreement had simply failed to provide for the possibility. The oversight is an expensive lesson.

The background facts to the case

The background to the case had a surprising start. Carewatch Care Services (Carewatch) first received notices to terminate the franchise agreement from one of its franchisees, Focus Caring Services (Focus). Focus had since 1999 operated a number of the franchised outlets. Carewatch is the second largest provider of home care services in the UK, operating through both directly-owned and franchised outlets.

Carewatch may not have thought, when the franchisee terminated, that it would need to rely on the Court (after a six-day trial) to enforce the post-termination non-compete clauses in the franchise agreement. The dispute arose in 2013 when Focus decided to start operating competing home care services under different brand names (Purely Care and Poppy Care) while the Carewatch franchise agreement was still on foot. Focus had taken this step as it was aggrieved that Carewatch had decided to operate company-owned outlets in Focus's non-exclusive territory. Carewatch considered Focus to be in breach of the franchise agreement and initially efforts were made by both parties to resolve matters. However negotiations broke down and Focus decided to terminate its franchise agreement.

In its termination letter, Focus agreed that it would comply...