Franchising: assessing a non-compete agreement

Joining a franchise network means adopting a shared business model, but also accepting certain restrictions. Before choosing a brand, one provision to assess is the non-compete agreement: it can affect businesses you already run and your work opportunities after leaving the network. Knowing how long it lasts is not enough. You need to understand what it prohibits, whom it applies to and what interest it protects.

1. Identify all restrictions, not just the non-compete clause

Restrictions on competition may appear in several parts of the contract: the franchisee’s obligations, confidentiality provisions, rules on shareholdings and the consequences of termination. Reading only the section headed “non-compete agreement” could therefore mean overlooking important restrictions.

Start by distinguishing between two situations:

• During the franchise relationship: the restriction may prevent you from running competing businesses, joining other networks or selling certain products and services.
• After the relationship ends: it may limit your ability to continue operating independently or work with another brand, even if the contract simply expires without renewal.

Next, ask for a clear definition of “competing activity”. Wording that covers any “similar or related” activity makes it difficult to assess in advance which ventures will be permitted.

Prepare a list of your current business activities, shareholdings and any roles you hold in other businesses. Share it with your lawyer and the franchisor to identify any conflicts before signing. Any agreed exceptions must be recorded in writing: a verbal assurance during sales discussions does not offer the same certainty as a precise contractual provision.

2. Understand the Italian and EU rules

In Italy, franchising is governed by Law No. 129 of 6 May 2004. The contract must be in writing to be valid. Article 4 requires a complete copy of the contract and the prescribed annexes to be provided at least thirty days before signing, subject to the exceptions set out in that provision. Use this period to examine the competition restrictions too: it is not simply a waiting period.

However, the franchising law does not provide a comprehensive set of rules for non-compete agreements. The applicable civil law and competition rules must also be considered. No particular duration automatically makes every non-compete agreement valid.

For vertical agreements, Regulation (EU) 2022/720 sets out the conditions for a block exemption from competition law prohibitions. Broadly speaking, the exemption requires both the supplier’s and the buyer’s market shares to be no more than 30%, as well as compliance with the other conditions laid down.

For a post-termination restriction, Article 5 sets out cumulative conditions: it must concern competing goods or services, be limited to the premises and land from which the franchisee operated, be indispensable to protect the know-how transferred, and last no more than one year.

This does not mean that every one-year restriction is lawful, nor that an agreement falling outside the exemption is automatically void: an individual assessment may be needed. Restrictions during the franchise relationship also require specific scrutiny, particularly if they exceed five years or include renewal provisions. Ask a professional with expertise in commercial contracts and competition law to carry out this review.

3. Assess the impact on your exit options

Translate each restriction into a practical consequence. If the contract ends, could you continue using your equipment and general skills to run an independent business? Could you work for another company? Would you be allowed to retain a purely financial stake in a competing company?

Create a table with four columns: prohibited activity, location, duration and consequences of a breach. Include contractual penalties, potential claims for damages and any obligations to stop particular activities immediately. Do not assume that paying a penalty allows you to disregard the restriction.

Consider three separate scenarios: expiry at the end of the agreed term, early exit and termination for breach by the franchisor. Check whether the wording seeks to impose the same restriction in every case, and ask your lawyer to assess its effects and enforceability.

Finally, consider costs that may continue while you are unable to carry on the planned business: rent, equipment finance payments and commitments to staff. A non-compete agreement can have a financial impact even without requiring a direct payment.

4. Negotiate clear wording and proportionate protections

Within a franchise network, protecting shared know-how is a legitimate aim. Negotiations should therefore distinguish between protecting that know-how and imposing a blanket ban on using your own professional experience.

Ask for clarification of:

• which products, services and activities are actually prohibited;
• who is bound by the restriction, including any related companies;
• which event triggers the post-termination restriction;
• which pre-existing activities are expressly permitted;
• how to obtain a written exemption for a future project.

Confidentiality and non-competition are not the same thing. Article 5 of Law No. 129/2004 requires franchisees to maintain the strictest confidentiality about the substance of the franchised business activity, and to ensure that their staff and other people working with them do the same, even after the relationship ends. Removing a non-compete restriction does not therefore authorise the disclosure of confidential information.

In practice: before signing, obtain a written statement of the activities you will be allowed to undertake during and after the franchise relationship. If you cannot clearly describe what you will be able to do after leaving, the clause still needs clarification.