An Overview of Non-Compete Clauses in Franchise Agreements

A non-compete clause is a legal and enforceable provision in a franchise contract/agreement prohibiting the franchisee from competing with the franchisor after leaving the franchised business–either through contract termination or expiry of the contract. A franchise lawyer can help you understand how a franchise contract is terminated.

Non-competition clauses should be explicitly drafted and must meet the conditions outlined under the franchise law. It would be best if you had a franchise lawyer draft a franchise contract with a non-compete clause conforming to franchise law. Writing such a clause without a lawyer’s input can present future challenges.

Where are Non-Compete Clauses Used?

Non-compete clauses are typically found in business-related contracts, such as:

• Employment/job contracts;
• Franchise contracts;
• Contracts for rights transfer in a business;
• Shareholders and partnership contracts;
• Business cooperation agreements;
• Licensing agreements; and others.

Features of a Valid Non-Compete Clause

A valid non-compete clause should have the following three minimum requirements:

1. Time Limitation 

Non-compete clauses apply to a specified timeline which could be months or years, after which the franchisee becomes free and can compete with the franchised business. Unreasonable non-compete clauses are considered invalid or null and void.

2. Geographical Limitations 

Non-compete clauses should have reasonable geographical limitations to protect the interests of both parties – the franchisor and franchisee. For instance, if the franchised business operates in town X, the clause can limit the operations of a franchisee for a particular surrounding area;

3. Niche-Focused 

Also, ambiguous clauses are interpreted against the franchisor, favoring the ex-franchisee impacted by such a non-compete clause. Why? Because franchise agreements are mainly drafted with the franchisor in mind, risking the interests of the franchisee.

Remedies for Violation of a Non-Compete Clause

The remedies for a non-compete clause violation are three, including:

• Requesting (via a warning letter) the faulting party to stop violating the clause and notify them that further violation will attract legal action.
• Filing legal action for breach of contract against the violator;
• Terminating the franchise contract.

Are Non-Compete Clauses Important to Franchising?

Indeed, the franchisor has significantly invested (time and money) in the franchised business, and undue competition is thus a potential risk to their prospects. Remember, the ex-franchisee had access to crucial data, such as trade secrets, which can be used to undermine the influence of franchised business or franchisor in their territory of operation.

Franchise agreements drafted without non-compete clauses jeopardize their business concepts because they cannot sue an ex-franchisee for unfair competition. On the other hand, signing a contract that does not include a non-compete clause may seem like an advantage to the franchisee, but that’s not the case. Why? Because the franchisor might not be able to protect the business concept (franchise system).

Non-compete clauses must meet the afore-mentioned conditions to be fair, valid, and enforceable, and that’s why legal advice is necessary when drafting franchise contracts.