Non-compete clauses in franchising: setting the boundaries

When you expand an established business into a franchise network, you share processes, expertise and business relationships with your partners. It is natural to want to prevent someone from immediately using your concept against you. However, a non-compete clause should not amount to a blanket ban on doing business. Before drawing up your first franchise agreement, identify what you are actually protecting, which activities you need to restrict and why narrower measures would not be enough.

1. Start by identifying the interest you want to protect

Start with a specific situation, not a contract template. Is there a risk that a franchisee will open a competing outlet alongside yours? That they will use confidential production processes for another brand? Or are you also concerned about a passive investment in a company whose activities overlap only marginally with your concept? Each situation calls for a different assessment.

Set out three things:

• The know-how being shared: which non-public information the partner will receive and its practical significance.
• The activities that pose a risk: how using that information could harm the concept or the working relationship.
• Less restrictive safeguards: whether confidentiality obligations, restricted access to documents or a ban on unauthorised use of the brand would address the problem.

For example, in a repair and maintenance franchise, diagnostic procedures and job scheduling may be sensitive. However, a ban on any business activity in technical services could also cover work unrelated to the know-how shared. The wording should reflect the actual competitive risk, rather than the broadest available definition of a business activity.

Confidentiality and non-compete obligations are not the same thing. The former protects information; the latter restricts a partner’s economic activity. Even a carefully drafted non-compete clause is no substitute for properly securing confidential materials.

2. Distinguish between Czech contract law and competition rules

The Czech Republic has no dedicated franchising legislation or general system of state approval for franchise concepts. A franchise agreement is usually concluded as an innominate contract under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. Freedom of contract does not, however, mean that every agreed restriction will stand up to scrutiny.

Section 2975 of the Civil Code is also important for non-compete clauses. It requires the prohibited competition to be sufficiently defined, limits the clause’s duration and prevents restrictions that go beyond what is needed to protect the party benefiting from them. At the request of the affected party, a court may narrow an excessive clause, set it aside or declare it invalid. Simply obtaining a partner’s signature beneath a general statement that they will not compete is therefore not enough.

Alongside this, Act No. 143/2001 Coll., on the Protection of Competition, applies, as may Article 101 of the Treaty on the Functioning of the European Union, depending on the circumstances. Commission Regulation (EU) 2022/720 on the block exemption for vertical agreements is an important point of reference.

Provided its conditions are met, the block exemption offers protection from the prohibition on certain anti-competitive agreements. Its basic conditions include both the supplier’s and the buyer’s market shares not exceeding 30% on their respective relevant markets. Meeting this threshold alone is not enough, however. Equally, a clause falling outside the block exemption is not automatically unlawful; it requires an individual assessment.

The European Code of Ethics for Franchising is a self-regulatory standard, not Czech law. It therefore does not replace a review under civil and competition law.

3. Separate restrictions during the relationship from those after it ends

During the relationship, preventing a partner from using the knowledge they have acquired to run a directly competing business at the same time may be a legitimate aim. Define the competing products or services, the activity concerned and the duration of the restriction. Consider separately the franchisee’s own business activities, their interests in other companies and their management of a competing outlet.

Regulation 2022/720 limits the availability of the block exemption for non-compete obligations that are indefinite or last longer than five years. There are, however, exceptions and specific conditions, for example for certain renewals of the obligation or operations based in premises provided by the supplier. Do not therefore automatically make the non-compete clause last as long as the franchise agreement.

The conditions are stricter once the relationship ends. For a post-termination non-compete obligation to benefit from the relevant exemption under Regulation 2022/720, it must meet all of the following conditions:

• relate to products or services that compete with the contract products or services;
• be limited to the premises and land from which the partner operated during the contract;
• be indispensable to protecting the know-how transferred;
• last no longer than one year after the agreement ends.

A one-year ban covering the whole of the Czech Republic therefore does not automatically satisfy this geographical limitation. Restrictions on using and disclosing know-how that has not entered the public domain are assessed differently: that protection may continue for longer.

4. Prepare a brief that is both defensible and workable

Before seeking a legal review, draw up a short table covering the protected information, prohibited activity, person concerned, location, duration and reason for the restriction. For each row, add a concrete example of a breach and an example of permitted conduct. This will expose ambiguities before a prospective franchisee starts raising them.

Discuss the partner’s existing activities too. Record any exceptions explicitly, so there is no later dispute over whether the franchisor knew about a side business. Keep penalties proportionate, and do not assume that a substantial contractual penalty will remedy a vague or impermissible restriction.

Practical takeaway: Have the clause reviewed from both a civil law and a competition law perspective. A narrow, clear and defensible restriction is more valuable to a healthy franchise network than a broad ban whose boundaries nobody understands in advance.