Franchise non-compete clauses: what can the contract restrict?

Joining a franchise network gives you more than the right to use a brand: you may also agree not to pursue certain other business activities. A non-compete clause can affect your existing company, investments and future business plans. Before buying a franchise, do not treat this provision as a mere formality. Establish exactly who it restricts, which activities it covers, where it applies and for how long.

1. Identify what the contract treats as competition

A non-compete clause may aim to protect the know-how provided and the franchise network’s shared commercial interests. That does not mean every formulation is equally justified or acceptable. Terms such as ‘similar activities’, ‘indirect interests’ or ‘supporting a competitor’ can leave too much room for interpretation.

Ask for the restriction to be tied to identifiable products, services and business roles. Running a directly competing business poses a different risk from holding a small investment that gives you no control over it.

In particular, check the following:

• Does the provision prohibit only an identical brand concept, or all services that customers could use as substitutes?
• Does it cover work as an employee, consultant or managing director?
• Does it prohibit acquiring a stake even if you do not control the other business?
• Does it affect online sales or a business operating in another town or city?

Assess the provision’s practical effect, not its heading. A conflict-of-interest declaration or a separate undertaking may contain a restriction just as significant as a contractual non-compete clause.

2. Understand the Hungarian and EU legal framework

Hungary has no standalone, comprehensive franchise act, but that does not mean franchise agreements are unregulated. Act V of 2013 on the Civil Code contains specific provisions on franchise agreements. General contract rules and competition law also apply.

Hungary’s rules on anti-competitive agreements are set out in Act LVII of 1996. Where trade between EU Member States is affected, Article 101 of the Treaty on the Functioning of the European Union is also relevant. Commission Regulation (EU) 2022/720 and the accompanying guidelines are important when assessing vertical agreements.

The block exemption provides an exemption from competition-law prohibitions for non-compete obligations that meet specified conditions. As a general rule, non-compete obligations of indefinite duration or lasting more than five years do not benefit from this exemption; exceptions and renewable clauses require separate examination. However, losing the exemption does not automatically make a clause unlawful: an individual assessment may be needed. In franchising, restrictions genuinely necessary to protect know-how are also particularly significant.

Neither ‘anything is allowed for up to five years’ nor ‘any non-compete clause is valid in franchising’ is therefore a sound starting point. Have the specific provision checked by a lawyer experienced in franchise and competition law.

3. Protect your existing businesses with written exceptions

At the start of negotiations, draw up a list of your existing companies, shareholdings and professional engagements. Specify what each business sells, where it operates and your role in it. This allows you to ask precise questions rather than simply, ‘Is this allowed?’

For example, an online shop you run alongside a service franchise may offer products that partly overlap with those sold by the network. In that situation, ask for a contractual exception rather than relying on verbal reassurance. It should identify the permitted business and activity, and set out the approval process for any expansion.

Also clarify who is bound by the undertaking. An obligation on the company signing the agreement is not the same as a separate personal undertaking by its owner. Nor does a relative or another company you own automatically become bound simply because they are mentioned in the contract. You may, however, be required to accept an obligation that exposes you to risk because of their activities.

If a new activity requires prior approval, ask for a decision deadline and objective assessment criteria. Also specify what happens if no response is received; do not assume that silence means consent.

4. Examine post-termination restrictions separately

Non-compete obligations during the agreement and those applying after it ends are assessed differently. Do not automatically accept that the same broad restriction should continue unchanged once the contractual relationship is over.

The EU Block Exemption Regulation sets narrow conditions for post-termination non-compete obligations. To qualify for the exemption, the restriction must, among other things, relate to competing goods or services, be limited to the premises and land from which the franchisee previously operated, be indispensable to protecting the know-how transferred, and last no more than one year. These conditions must all be met; a one-year limit alone is not enough.

Ask what specific knowledge the provision protects and why the stated restriction is necessary to protect it. A ban on using or disclosing know-how that is not publicly available is a separate issue: it should not be conflated with a ban on carrying on a business altogether.

5. Calculate the commercial cost of the commitment

A non-compete obligation can have a cost even if it carries no separate fee. You may lose an existing source of income, have to sell a business interest or postpone opening another business. Include these effects in your budget for buying the franchise.

Review the consequences of a breach: is there a contractual penalty, a right to terminate, and under what conditions can damages be claimed? A severe sanction attached to a vaguely defined activity is particularly risky. Ask for clearer wording and, where a breach can be remedied, an appropriate notice and remedy procedure.

Practical takeaway: before signing, prepare a one-page summary of the prohibited activities, the people and entities affected, the geographical scope, the duration and the exceptions. If it does not clearly tell you which of your business plans remain feasible, the clause needs further negotiation.