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Date: February 28, 2020
Posted by: CPDMA Team

Justice closes franchise stores for violation of non-compete clause

Such convictions will be even more frequent with the entry into force of the new Franchise Law, according to lawyers.

Former franchisees have been convicted in court or in arbitration for violating non-compete clauses established in the contracts. Some decisions benefit networks such as Água Doce Cachaçaria, Sóbrancelhas and China in Box.

They establish the closing of the doors or the suspension of the activities of stores that just changed their name, keeping the same business. Such convictions will be even more frequent, according to lawyers, with the entry into force of the new Franchise Law (Law No. 13,966) on March 26. This is because article 2, item XV, subparagraph a, makes the protection of the “know-how” provided by the franchisor broader.

In Brazil, there were 2,916 franchise brands at the end of last year, with a total turnover of R$ 186.8 billion and which generate approximately 1.3 million jobs, according to a previous survey by the Brazilian Franchising Association (ABF).

One of the cases was recently judged by the 2nd Reserved Chamber of Business Law of the São Paulo Court of Justice (TJ-SP). The magistrates gave a period of five days, under penalty of a daily fine of R$ 2 thousand, for a franchisee of Água Doce Cachaçaria in Araras to close its doors. After the termination of the contract, she continued working in the same place, with a similar menu, under the name Restaurante Santa Dose Gastronomia Brasileira (interlocutory appeal no 2166612- 30.2019.8.26.0000).

The franchisor signed the contract on November 30, 2011, for a period of five years. After the deadline, there was an extension. However, due to non-payment of royalties, in addition to other fees, the cachaçaria sent an extrajudicial notice of termination in May 2018. “However, the restaurant continued to carry out the same activity, in the same place, taking advantage of the know-how provided by the franchisor. Even with a clause that prevented him from exploring similar activity for two years after termination of the contract”, says lawyer Thaís Kurita, from Novoa Prado Advogados, who defends the franchisor.

For the rapporteur of the case, judge José Araldo da Costa Telles, there was unfair competition "either because the restaurant business is maintained or because the title of the establishment itself constitutes competition, prohibited by an express contractual provision, when alluding to the dose, an expression notoriously linked to cachaça, a reference product of the appellant's business name".

The court decision has already been carried out, according to lawyer Fernanda Escobar, who advises the former franchisee. According to her, the Santa Dose denomination is nothing like the old one. “There was and is not any kind of unfair and illicit competition. The allegation that Santa Dose was selling products that are the flagship sales of Água Doce is untrue”, he says. “The two brands are undoubtedly different, that is, they start from different concepts and menus.”

The franchise agreement, adds the lawyer, is totally abusive and harms the dignity of the human person. “It practically prevents the owner of the franchised company from working in the business for two years, or any gastronomic area that the franchise deems unfair competition”, he says. She adds that the same 2nd Reserved Chamber of Business Law gave a contrary decision in a similar process, which involves another former franchisee of the same cachaçaria (process no 1004672-39.2018.8.26.0637).

A franchisee of the China In box chain also had its contract interrupted, after being in default on fees. The contract provided for a two-year period of non-compete. The franchisor claimed in the lawsuit that, even after an extrajudicial notification informing the termination, nothing was done and that, in addition to using its know-how and diverting customers, it would no longer be possible to guarantee the origin of the inputs used for the dishes, which could damage the brand's image and reputation.

In the judgment, the judges of the 1st Reserved Chamber of Business Law determined that the company no longer used the name China In box and immediately stopped providing any product or service of the brand. The decision can no longer be appealed. The franchisee does not have a lawyer in the process.

Also in São Paulo, a franchisee with two Sóbrancelhas brand stores, located in shopping malls in São Paulo, was even ordered in arbitration to pay R$ 300 thousand for violating the non-compete clauses. They predicted that he would not be able to work in the same field for three years. In this case, after receiving training, they created their own franchise network, under the contract with Sóbrancelhas.

After the arbitration award, the franchisor filed a criminal action against the franchisee's owners, alleging that they enticed the brand's customers to their new salons. They were eventually convicted of a crime of unfair competition, with three months' detention. The process runs in secrecy of justice.

According to lawyer Thaís Kurita, who has been acting on behalf of franchisors, including Água Doce Cachaçaria, Sóbrancelhas and China in Box, non-compliance with non-compete clauses has been common, especially in cases with royalty and fee debts that triggered the termination of contracts. According to her, the TJ-SP has maintained compliance with these clauses, as long as they have been written in a reasonable way. “You can't say that the franchisee can never compete in the food sector again, for example. It has to be well defined and within a reasonable period of time”, he says. “You have to protect the network.”

For ABF's legal director, Fernando Tardioli, one of the pillars of the franchise agreement is precisely the transfer of know-how. “No franchisee will open their unit without being trained by the franchisor. In addition, as the brand is already known, he has to make less effort to win over customers,” he says. In these cases, he adds, the client expects to be served without distinction with the same standard, “whether in São Paulo or Minas Gerais”, he says. He adds that “the franchisor has tested its method for years and knows how the product and service should be offered.”

Source: Adriana Aguiar via Valor Econômico.

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