Non-compete clauses in franchising: how to get them right

When you turn an existing business into a franchise network, it is natural to want to prevent the business model you share from helping a competitor. However, a non-compete clause must not become a blanket ban on working. Before including one in the agreement, identify what needs protecting, which activities should be restricted and for how long. A proportionate clause protects the franchisor without unnecessarily compromising the franchisee’s professional future.

1. Identify the risk before drafting the restriction

The first question is not ‘How do I stop the franchisee competing with me?’ but ‘What specific risk arises from sharing my business model?’ For an established business, this means separating the value actually being transferred from skills that any entrepreneur could acquire on the market.

Prepare an internal note covering three points:

• the non-public operational knowledge that will be shared;
• the competing activities that could make direct use of it;
• the reasons why confidentiality alone might not be sufficient.

For example, prohibiting the use of confidential procedures is not the same as prohibiting all commercial activity. A specialist business model does not automatically justify a restriction covering products and services unrelated to the network’s offering.

Also distinguish between confidentiality and non-competition. The former concerns the disclosure or use of protected information; the latter restricts the conduct of a business activity. They are not interchangeable and require different checks. If the only concern is the circulation of internal documents, adding a broad non-compete restriction could be a disproportionate response.

2. Separate obligations during the agreement from those after it ends

A non-compete obligation that applies during the franchise relationship serves different needs from one intended to survive its termination. In the first case, the aim might be to prevent the franchisee from simultaneously running a directly competing business. In the second, it restricts the activities of an entrepreneur who no longer belongs to the network.

Carry out two separate assessments, even if the provisions appear in the same clause of the agreement. For each, specify:

• which activities are prohibited, using clear descriptions;
• who is bound by the restriction;
• where the restriction applies;
• when it starts and ends;
• what exceptions, if any, may be authorised.

Do not assume that an agreement signed by a company automatically binds its shareholders, directors or their family members. Any extension to other people requires a specific assessment, not a catch-all provision.

Also ask the prospective franchisee to disclose any existing business activities. If they hold interests in other businesses or run ventures that could be incompatible with the obligation, address these before signing. The aim is not to repeat the franchisee selection process, but to avoid creating a contractual obligation that is impossible to comply with from the outset.

3. Check Italian legislation and European rules

In Italy, franchising is governed by Law No. 129 of 6 May 2004. The agreement must be in writing to be valid, and a complete copy, together with the required annexes, must be provided at least thirty days before signing. The non-compete clause must therefore be clearly set out and available for assessment in the text supplied to the prospective franchisee, rather than appearing as a surprise at signing.

Law No. 129/2004 does not automatically make every restriction valid. The applicable civil law provisions, including Article 2596 of the Italian Civil Code, and competition rules must also be considered. Within its scope of application, Article 2596 requires written evidence of the non-compete agreement, a restriction limited to a specified area or activity, and a maximum duration of five years. However, this is not a general authorisation to impose a five-year ban after the franchise relationship ends.

At European level, Regulation (EU) 2022/720 provides a block exemption for certain vertical agreements. For post-termination non-compete obligations, the exemption requires several conditions to be met together: they must concern competing goods or services, be limited to the premises and land from which the franchisee operated, be indispensable to protecting the know-how transferred, and last no longer than one year.

Falling outside the exemption does not automatically mean that a restriction is unlawful: it means an individual assessment is needed. Obligations applying during the relationship also require specific examination. Have the clause reviewed by a lawyer with expertise in franchising and competition law, rather than copying templates used by other networks.

4. Make the clause clear and workable

Before adopting the wording, test it against practical scenarios: the franchisee opens a different business at the same premises; launches a competing offering elsewhere; or already holds a stake in another business. In each case, the agreement should provide a basis for a reasoned answer, rather than leaving the outcome to a sales representative’s interpretation.

Prepare a short explanation for prospective franchisees, making clear that it does not replace the agreement. Also specify who can authorise exceptions and how these should be documented. Any contractual penalties should be assessed for proportionality: a large sum does not make a poorly drafted restriction valid.

In practice: before offering a franchise, document the risk, separate restrictions during the relationship from those after it ends, and have both legally reviewed. Protect what you transfer, without prohibiting more than you can justify.