Build evidence early: Lessons from franchise non-competition disputes

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Most franchise disputes are not won or lost on the strength of legal arguments. The outcomes of franchise disputes (and, indeed, the vast majority of all cases) often hinge on the evidence that the parties to the dispute put forward, and, to some extent, the procedural path in the case. One of the most common and intensive disputes in Canadian franchising – enforcing or resisting non-competition covenants – illustrates this. 

Franchise non-competition covenants are subject to closer judicial scrutiny than franchise agreements in general. Courts often view franchise agreements as standard-form contracts between parties with unequal bargaining power, so the non-competition covenant must be justified for its objective. 

To survive legal scrutiny, a non-competition covenant generally needs three elements:

1. 1. a clearly defined competing business or product – more than a generic reference to “a competing business”; 
   2. a commercially reasonable duration – courts tend to treat one to two years after termination as the outer range of what is reasonable, depending on the industry and circumstances, and 
   3. a geographic scope tied to where the franchise system operates or genuinely intends to operate. 

Courts will not rewrite an overly broad clause to make it reasonable. They will strike the whole covenant down. That should shape how franchisors draft these covenants in the first place, not only how they litigate them later. (For a fuller breakdown of the enforceability test and injunction process, see our guide to franchise non-compete enforcement in Canada.)

Drafting is only half the job. Even a well drafted covenant needs evidentiary support to be enforceable in practice, particularly if a franchisor is seeking an interlocutory injunction. Courts apply a three-part test:   

1. 1. a serious issue to be tried or the higher standard of a strong prima facie case for mandatory injunctions (a ‘mandatory injunction’ has been defined by some judges as requiring the responding party to undertake a positive course of action to comply with an agreement or otherwise restore the status quo); 
   2. irreparable harm that damages cannot fix, and 
   3. a balance of convenience favouring the granting of the injunction. 
      

Each leg of the test depends on specific and concrete evidence. For example, some of these questions may need evidence:  

1. 1. how customers find the business; 
   2. how long it takes to locate and set up a replacement franchisee, and 
   3. any documented misuse of confidential systems, trade secrets, or supplier relationships.

Interlocutory injunctions, which courts treat as an extraordinary remedy, are difficult to obtain on a thin record. Without a strong evidentiary record, a court may see a superficial non-competition covenant with no demonstrated commercial harm behind it. 

Several court decisions illustrate this playing out both ways. A recent Ontario case, Keller Williams Realty v. VIP Realty Inc., turned on the enforceability of an in-term non-competition covenant, i.e., a restriction against competition during the term of the franchise agreement. The real estate broker franchisees set up a competing real estate brokerage operation with Royal Lepage, a larger direct competitor, during the term of the franchise agreement. That resulted in a loss of about 600 real estate agents in two major franchises in two major markets to the Keller Williams Realty franchise system.  

The franchisees claimed that Keller Williams Realty repudiated or fundamentally breached the franchise agreements and that the non-competition agreements were overly broad. But they refused to produce unredacted copies of the new franchise agreements that they signed with their new Royal Lepage franchisor. The court drew a negative inference that if their new franchise agreements contained narrower covenants, the franchisees would have produced them. The court found that Keller Williams Realty demonstrated a strong prima facie case and granted a mandatory injunction against the former franchisees. 

In a British Columbia case, Garcha Bros Meat Shop Ltd. v. Singh (2022), a former franchisee transferred the lease of his location to his sister, who opened an essentially identical shop in the same space. The court rejected the argument that the non-competition covenant was ambiguous and found that the arrangement was a deliberate attempt to defeat the restriction, a transfer in name only.  

In an Ontario case, MEDIchair LP v. DME Medequip Inc. (2015), the Court of Appeal for Ontario reached the opposite result: the franchisor had no legitimate interest to protect in the contested territory because it had already shifted its own business there under a different brand. The non-competition covenant was not enforceable because the franchisor could not show the commercial interest that it was seeking to protect. (I discussed both decisions, along with the broader test for enforceability, in Are Non-Competition Restrictions Enforceable.)

Franchisees resisting enforcement carry a parallel evidentiary burden. Rebranding alone rarely defeats a non-competition claim. Courts tend to look beyond the surface, to whether the new business is genuinely different. In RFSP Equipment v. Singh (2022), the British Columbia Supreme Court found that Freshslice franchisees who had fully rebranded with a new name, suppliers, menu and point of sale system, had caused no demonstrable harm to the franchisor’s goodwill, and declined to grant an injunction. 

The lesson for franchisees is: the more complete and well documented the differentiation between the old and new business, including the products, supply chains, customer channels, etc., the stronger the argument that the new venture may not undermine the franchisor’s legitimate interests. (Full case details are in our summary of the Freshslice decision.)

Both sides should also weigh dispute resolution mechanics early. Many franchise agreements require mediation before litigation or arbitration. That step can produce a negotiated outcome, modified territory, a buyout, or co-existence terms that may avoid the cost and exposure of a contested injunction hearing or litigation on either side.

Looking at how these decisions tend to unfold, parties should look to not only the wording of the franchise agreement or the non-competition covenant, but equally, the evidence that they are presenting in their case to support or object to the non-competition allegations.