Buying a franchise: Have the non-compete clause reviewed

When you join a franchise network, the franchisor may have a legitimate interest in protecting the concept’s confidential know-how. However, a non-compete clause can also restrict your ability to run another business, invest or use your experience after the relationship ends. You therefore need to understand exactly who and what the clause covers before you sign—not when you decide to move on.

Map out what you will be prevented from doing

Start by finding every provision relating to competing activities. These may appear in several places: the franchise agreement, a personal undertaking, schedules or a separate confidentiality agreement. The heading is not decisive; what matters is the substance of the provision.

Then work through four questions:

• Who is bound? Only the operating company, or also you personally and any co-owners?
• Which activities are covered? Running your own business, employment elsewhere, consultancy or holding shares?
• Where does the restriction apply? At specific premises, within a geographical area or without a clear boundary?
• When does it apply? During the relationship, after it ends or both?

Ask for a precise definition of what counts as a competing business. A ban on working with particular products is different from a ban on any activity that might compete with the franchisor’s current or future offering.

If you already have another business or investment, have it assessed specifically. Propose an express exemption rather than relying on the franchisor’s awareness and acceptance of the arrangement.

Understand the Danish rules and their limits

Denmark has no dedicated franchise legislation. Nor is there a specific public franchise register or a statutory standard disclosure document that must be provided before an agreement is signed. General duties of loyalty and disclosure may nevertheless require material information to be disclosed.

Franchise agreements are governed, among other things, by the Danish Contracts Act and general principles of contract law. The Danish Competition Act and EU competition rules are central where an agreement restricts competing activities. The EU Vertical Block Exemption Regulation, Regulation 2022/720, provides a framework under which certain agreements may be exempt from the prohibition on anti-competitive agreements.

The block exemption is not a blanket approval of every non-compete clause. Its application depends, among other things, on the parties’ market shares and the agreement’s other restrictions. Non-compete obligations applying during the agreement that are indefinite or exceed five years generally fall outside the block exemption’s protection, although there are exceptions and qualifications.

This does not mean that a longer clause is automatically unlawful. Equally, a shorter clause is not automatically lawful. In franchise networks, the need to protect know-how and the identity of the concept may also be relevant. Have the clause assessed on its specific terms rather than treating five years as a simple rule of thumb.

Section 36 of the Danish Contracts Act allows unreasonable terms to be amended or set aside. However, the courts are reluctant to apply this provision to commercial agreements. It is no substitute for negotiating reasonable limits in advance.

Examine the post-termination period separately

A restriction that applies after the relationship ends deserves particular attention, as it may limit your next source of income even though you no longer have access to the franchise concept.

For a post-termination non-compete obligation to fall within the block exemption’s specific exception, several conditions must all be met. It must relate to competing goods or services, be limited to the premises and land from which you operated under the agreement, be indispensable to protecting the know-how transferred to you, and last no more than one year after termination.

A nationwide restriction therefore does not fall within this exception simply because it lasts for one year. Clauses outside the exception require a separate competition law assessment.

Ask the franchisor to explain precisely which know-how needs protecting and why a non-compete restriction is necessary. Distinguish between confidential knowledge of the franchise concept and general skills you have developed yourself. Confidentiality obligations and non-compete restrictions are different tools; protecting confidential know-how does not always require a broad ban on working.

Negotiate with your specific plans in mind

Give your lawyer more than just the contract. Also describe your existing activities and realistic future plans. Otherwise, a legal review may overlook the very restriction that matters most to you.

Ask your adviser to consider specific scenarios: Can you retain a small passive investment? Can you work as an employee for another business? Can you continue an existing activity that only partly overlaps with the franchise concept?

Then negotiate precise product categories, the people covered, the duration and any exemptions. Also check the consequences of an alleged breach, including contractual penalties and the possibility of an order requiring the activity to stop. A poorly defined clause can cause difficulties even before its validity has been determined.

Practical takeaway: List your current activities and possible next career steps on one page. Have each item checked against the non-compete clause, and ensure any necessary limits are written into the final agreement before you sign.