Franchising: setting limits on non-compete obligations during the contract

Turning an existing business into a franchise network means sharing methods with entrepreneurs who may already have other business interests. A non-compete clause can protect what you share, but it must not become a blanket ban on running other businesses. Before including one in your first franchise agreement, clearly define the risk you want to prevent, the activities covered and the limits needed.

1. Identify what the clause really needs to protect

A non-compete obligation during the contract aims to prevent the franchisee from carrying out certain competing activities alongside their franchised business. It is distinct from confidentiality, which prohibits the disclosure of protected information, and from post-contractual non-compete obligations, which require a different legal assessment.

For a prospective franchisor, the first question is therefore not: “How can I prohibit all competition?” but: “What other business activity could undermine the transfer and operation of my concept?”

List the specific situations that concern you:

• simultaneously operating an outlet with a directly competing offering;
• actively participating in another competing brand’s business;
• using the methods shared to develop a rival offering;
• diverting business opportunities to another company owned by the franchisee.

These situations do not necessarily all call for the same clause. Disclosure is also a confidentiality issue, while disloyal conduct may give rise to contractual liability. Do not use a non-compete clause as a one-size-fits-all response to every risk.

For each proposed restriction, record the legitimate interest it protects and why a less restrictive measure would be insufficient.

2. Define the activities and people covered

Avoid wording such as “any similar activity, directly or indirectly”. Without a practical definition, this can make the clause difficult to understand and lead to disputes.

Instead, describe the competing products or services, the target customers and the ways of operating covered by the restriction. A business offering several services should not automatically be treated as a competitor across all its activities.

Also specify the geographical scope of the restriction. This should reflect the protection sought, rather than simply mirror your ambitions for nationwide expansion. An exclusive trading territory and the area covered by a non-compete obligation serve different purposes: they are not automatically the same.

Next, consider who is bound by the obligation. If a company signs the agreement, that alone does not make its directors or shareholders personally liable for all its obligations. Any personal undertaking requires appropriate drafting and a review of its validity.

Finally, distinguish between actively managing a competing business and holding a financial investment with no influence over how it is run. Having this distinction checked helps avoid an unnecessarily broad restriction.

3. Check proportionality and the applicable law

In France, there is no single statutory regime governing every aspect of a franchise agreement. General contract law and competition law apply, among other rules, to restrictions agreed between franchisor and franchisee.

A clause is therefore not valid simply because it appears in a template agreement. Its necessity and proportionality must be assessed in light of the concept, the know-how transferred and its actual scope.

The EU Vertical Block Exemption Regulation, Regulation (EU) 2022/720, also provides an important framework where its conditions apply. It addresses, among other things, non-compete obligations of indefinite duration or lasting more than five years. However, franchise agreements have particular features that must be considered: five years is neither a mandatory duration nor a universal upper limit for validity. A clause that does not benefit from the exemption is not automatically unlawful; it requires an individual assessment.

Pre-contractual disclosure must also be consistent. Article L. 330-3 of the French Commercial Code, introduced by the Doubin Law of 31 December 1989, requires, where its conditions are met, that the pre-contractual disclosure document (known in France as the DIP) and draft agreement be provided at least twenty days before signing or any advance payment. Article R. 330-1 specifies, among other things, the information to be provided about the scope of exclusivity arrangements. Do not leave prospective franchisees to discover a significant restriction only when they sign.

4. Establish a procedure for other business activities

Before a prospective franchisee commits, ask them to disclose their existing activities and relevant ownership interests. This helps identify incompatibilities before they turn into disputes.

Then establish a written procedure for new projects: the information to be submitted, the appropriate contact, the assessment criteria and how any approval will be documented. Any exemption should specify its scope and conditions, without suggesting that it amounts to blanket permission.

Finally, have the consequences of a breach reviewed. Immediate termination should not be presented as an automatic entitlement in every situation.

Key takeaway: start with a specific risk, draft a targeted restriction and have it reviewed before presenting it to prospective franchisees. Clear, understandable commitments protect a franchise network better than excessive prohibitions.