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SA Franchise Issue If I Replicate Business Model?

Discussion in 'Commercial Law Forum' started by Pumped1211, 8 December 2014.

  1. Pumped1211

    Pumped1211 Active Member

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    Hi there.

    My brother is a current Franchisee with a company. He's happy and the franchise is doing really well. I have noticed his concept or what he's doing in terms of marketing and trade secret ideas are very simple and can be executed by anyone. Having worked for him a few times, I had an idea of doing my own business similar to his almost same product, just tweaked. I don't want it to affect his business or get him in trouble but I really want to go for it as I think my idea, in my opinion, will be hugely beneficial. I would obviously hire a commercial lawyer before doing anything but I just want to get an idea if anyone else has dealt with an issue like this.

    Will he be breaking his franchise agreement under commercial law if I do something similar to his business?

    I was "inspired" by his work but he never gave me anything and has no idea what I'm planning. What do I do?

    Any help would be great.
     
  2. Sophea

    Sophea Well-Known Member

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    Hi Pumped1211,
    Franchise agreements often include a "restraint of trade" clause which prevents the franchisee from competing with the business and the franchisor during and after the term of their franchise agreement. Therefore your brother is likely restricted from establishing a business that competes with the franchise during the term of his franchise agreement and for a limited period of time afterwards (i.e. 6-12 months or so depending on what the contract says) and perhaps for a limited geographical area. Franchisors spend a lot of time and money building a brand, so they are obviously entitled to protect their commercial interests by using such a clause.

    Your brother would likely be unable to use any of the franchisor's systems, procedures or intellectual property in a competing business - ever. Also he is probably not allowed to solicit customers or employees from the franchised business. Usually once the restraint period expires, your brother would be able to work for or operate a competing business provided he doesn't infringe any intellectual property rights or private and confidential information of the franchise.

    If your brother breaches the restraint clause, the franchisor is able to take legal action and obtain compensation for any commercial loss suffered, in addition to reimbursement of his legal costs.
     
  3. Pumped1211

    Pumped1211 Active Member

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    Thank you that's very helpful. Were do i stand on all this, i mean i don't want anything i do to affect my brother. Imagine if it was just a another customer who came along to an event and noticed "hey i can do that" i might replicate it, goes off and does their own business. Now imagine that customer is me. Does it change as im his sister and we have the same last name or ? Now i know this might be in his franchise agreement the issue is i don't want to ask him for it in case i upset him. FYI if anything i did affected my brother then i would simply not do it.

    Cheer
    Amanda
     
  4. Sophea

    Sophea Well-Known Member

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    Hi Amanda,

    The Franchise Agreement is a contract between your brother and the franchisor, not you and the franchisor, therefore you are not bound by its terms. Similarly, your brother is not liable under the agreement for your brother's actions.

    It depends on whether you are intending to employ or otherwise involve your brother in your new venture. As I stated above, there are likely restrictions on what he can do for a certain period of time and/or in a specific location. Otherwise are you thinking of going into direct competition with your brother?
     
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  5. Pumped1211

    Pumped1211 Active Member

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    Thanks for that information, im not looking at going into direct competition with my brother no. Although some of the products are the same as in a cheese cake is a cheese cake no matter were you go. Mine will offer many more additional services.

    The business he is franchisee for is a Cake business, now im sure there would be something in his agreement stating that anything he knows about cake making he learnt from his franchise. My question is his business didnt create "cakes", neither do they own the process of baking or using baking equipment. Just like you cant own the rights to making a sandwich or selling cookies if your a part of subway. These processes are universally found all over the internet and are common knowledge.
     
  6. Sophea

    Sophea Well-Known Member

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    Yes you are correct in that, you can't own commonly used processes and generic things, restraints on trading generally are more directed toward the location you operate in and the clients that you attract. But if your brother is not involved in your business then since you are not a party to the franchise agreement, you are not bound by it.
     
  7. DennisD

    DennisD Well-Known Member

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    My initial reckoning is that it's not only about whether you intend to employ your brother

    You said you had some involvement with the business. Were you yourself on an employment contract or not?

    You may not like the idea that you are 'competing' with your brother's business, however by the sounds of it you are offering substantially the same product or service with minor tweaks. Is that correct?
     
  8. Pumped1211

    Pumped1211 Active Member

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    Thanks for that Sophea.

    I worked with my brother not on a employment contract, more so give him a hand when he needed it.

    Some are the same product but not using any of his methods, all are commonly used processes which you can find using a google search.
     
  9. Sarah J

    Sarah J Well-Known Member

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    Hi Pumpd1211,

    It seems to me, there are two issues here:

    1. Can you compete with the franchise? The answer is yes. There is only a non-compete clause between your brother and the owner of the franchise which does not prevent you from competing with the franchise. Therefore, if you wanted to enter into the same area of business, compete with the same clients, use the same suppliers, you are within your rights to do so. The agreement will not prevent you and your brother will not be affected by this.

    2. Can you use trade secrets or confidential information obtained from your brother in setting up your business? The answer is maybe. Your brother's franchise agreement should contain a provision on "confidential information". Check if any of the information you are relying on for this "inspiration" falls under confidential information. If so, your brother would be breaching his agreement by allowing you access to this information (i.e. disclosure) and therefore, whilst you can certainly take advantage of it, your brother may be breaching his agreement.
     
  10. Pumped1211

    Pumped1211 Active Member

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    Hey guys i posted a question earlier in the month regarding my brother and his franchise and how i want to make a similar business but i don't want it to affect his current franchise. Its a cake making franchise which i wont name but after speaking to my brother about it i found out that hes really struggling to make it worthwhile as the royalty fee is killing him. My question is this, if he wants to break his franchise agreement he has a 3 year,2 year and 1 year restraint period were he cant offer products or services the same or similar to those at any time supplied by his Cake franchise business or could be reasonably regarded as a market competitor.

    Question 1) Can he work for my business that i am going to open but not actually own or have anything to do with its setup. There is a franchise clause that states restraint applies

    to conduct of a franchisee in any capacity. Alone,in partnership or association with another person. As principal,agent,representative,director, officer or employee. As member, shareholder, debenture holder,note holder or holder of any other security. As trustee of or as a consultant or adviser to any person or in any other capacity.

    Will this stuff hold out in court or if he appointed a lawyer?
    Isn't this denying someone the right to earn an income in their chosen field?, he has been making cakes since he was 14.

    Question 2) The restraint clause has 3, 2 and 1 year. Clearly this is so the franchisor has room to negotiate and not have the clause completely thrown out. how does he go about leaving his franchise first and then challenging that clause. Hes happy to have a 1 year restraint clause but surely 3 years is unreasonable.

    Cheers
     

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