A store chain owner suspected that one of the franchisees secretly became a shareholder in a competing store chain using his brother as a "straw man”. Following these suspicions, the chain terminated the franchise agreements for two branches and for the third branch demanded to activate a "forced separation" mechanism due to "breach of trust." The franchisees contended that the termination was unlawful and established an alternative brand while seeking damages for their losses.
The Court dismissed the chain's claim due to a breach of the heightened duty of good faith, the absence of a breach in providing the loan, and the absence of misappropriation of trade secrets or trademark infringement. While terminating a franchise agreement due to the misappropriation of trade secrets does not require proof of actual damage, terminating a franchise agreement due to a breach of the duties of good faith and loyalty is possible under certain conditions only if a solid and objective factual foundation exists. A clause in a franchise agreement restricting freedom of occupation during the contract period will not apply in a case where the franchisor unlawfully terminated the agreement. In our case, the termination of the franchise agreements by the store chain was done unlawfully and based solely on subjective suspicions, without an objective factual foundation establishing a breach of trust or a secret partnership in a competing chain. As a result, the store chain's claim was dismissed in its entirety, while the franchisees' claim was partially accepted, and damages were awarded in their favor for the unlawful termination of the franchise.