Franchising in Denmark: Define the Scope of Non-Compete Clauses

When turning your existing business into a franchise network, it may seem natural to prohibit franchisees from running a competing business. But a broad ban does not necessarily provide effective protection. A non-compete clause should reflect your particular concept, the knowledge you share and the working relationship you want to establish. Here is a practical approach to defining restrictions on competition during the agreement’s term, before you sign your first franchise agreement.

1. Describe the risk the clause needs to address

Do not start with standard wording taken from another agreement. Start by describing what the franchisee will have access to and how running a competing activity alongside the franchise could specifically harm the concept.

Does this involve, for example, a distinctive working method, an integrated service concept or confidential knowledge about production and customer service? A desire to avoid all competition is not, in itself, sufficient justification for every restriction.

Draw up a short working note covering three points:

• What needs protecting: What specific knowledge or part of the concept requires protection?
• The activity posing a risk: What could the franchisee do in another business that would create the problem?
• A less restrictive alternative: Could confidentiality obligations, restrictions on the use of materials or clear requirements for time and effort address the problem?

In particular, distinguish between competition and a lack of commitment. If your concern is that the franchisee will spend too little time on the franchise unit, consider whether a requirement relating to day-to-day management would be more precise than a ban on all other business activities.

This note will make it easier for an adviser to assess the clause. It will also help you explain its purpose to prospective members of the franchise network.

2. Understand the difference between freedom of contract and competition rules

Denmark has no dedicated franchise legislation and no separate requirement to register franchise agreements. The Danish Contracts Act and general principles of contract law provide the basis for the agreement. Section 36 of the Contracts Act, for example, may be relevant to unfair terms. The Danish Competition Act and, where applicable, EU competition rules also set limits on restrictions on competition.

The EU Vertical Block Exemption Regulation, Regulation (EU) 2022/720, is relevant to many franchise agreements. It provides a framework under which certain agreements may be exempt from the prohibition on anti-competitive agreements, provided the conditions are met. This depends, among other things, on the parties’ market shares and the other restrictions in the agreement.

Under this framework, non-compete obligations of indefinite duration or lasting more than five years generally fall outside the block exemption. There are, however, qualifications and exceptions. For example, tacit renewal beyond five years may be covered if the franchisee can genuinely renegotiate or terminate the agreement at reasonable notice and at reasonable cost.

Falling outside the block exemption does not automatically mean a clause is unlawful. It means the clause requires an individual assessment. In franchising, it may also matter whether a restriction is necessary to protect transferred know-how or maintain the network’s identity and reputation. This is not a general licence to impose broad bans.

You should therefore have the clause assessed alongside the agreement as a whole. Five years is neither an automatic approval nor a universal maximum term for a franchise agreement.

3. Make the restriction specific and clear

A prospective franchisee should be able to read the clause and understand which activities are permitted. Wording such as ‘any direct or indirect interest in a similar business’ can create considerable uncertainty.

Work systematically through the following aspects of its scope:

• Activities: Which products or services are considered competing? Base this on what the concept actually offers rather than very broad categories.
• Roles: Does the restriction cover actively running a business, consultancy, employment, ownership or several of these?
• Territory: What geographical scope can be justified in the context of the particular relationship?
• Duration: When does the restriction begin and end, and how will an extension be treated?
• Exceptions: How will existing activities and passive investments be handled?

If the franchisee already runs another business, clarify the position before signing. Define any approval precisely so that both parties know whether it also covers subsequent expansion.

Also consider who is bound by the clause. An agreement with a company does not automatically impose the same personal obligations on its owner or other individuals. Any separate obligations require their own legal assessment.

4. Introduce a simple process for cases of doubt

Even a precisely drafted clause can raise questions. Agree on a process through which the franchisee can have a new activity assessed before investing in it.

Specify what information the franchisor must receive, who will make the decision and when a response can be expected. Explain the decision by reference to the risk the clause is intended to address, rather than relying solely on the franchisor’s discretion.

Also review the clause whenever the concept changes significantly and before renewal. New services should not automatically turn a previously accepted side activity into a breach of contract. Restrictions after the agreement ends must be assessed separately; the rules applying during its term cannot simply be carried over.

Practical takeaway: First, write down what needs protecting. Then define the activities, people and duration covered, and have the overall approach assessed under competition law before using it in your franchise network.