Non-compete obligations in Japan: what to check before joining a franchise

A franchise is a community in which businesses grow by sharing the franchisor’s knowledge and brand. A non-compete obligation is one contractual provision designed to protect that trust. Depending on its scope, however, it may restrict your existing work or future business plans. When choosing a franchise brand, look beyond profitability at launch and establish which other activities you will be allowed to continue.

Understand the difference between non-compete and confidentiality obligations

A non-compete obligation restricts involvement in businesses that compete with the franchisor. It may apply only during the franchise agreement, or continue for a specified period after the agreement ends. First, identify where the obligation appears in the contract and exactly when it starts and ends.

Confidentiality obligations, by contrast, restrict the disclosure of business information, operational know-how and similar material to outside parties, or its use for purposes not permitted by the agreement. Agreeing not to use confidential information is different from agreeing not to carry on the same type of business. Do not assume that keeping information confidential means you are free to open another outlet.

Check not only the contract but also any undertakings, schedules and operating rules for relevant conditions. If the franchisor can amend the rules, ask whether those changes could also broaden the activities prohibited.

A useful question for the franchisor is: “What is this restriction intended to protect?” Once you know whether the concern is a secret preparation method, customer information or a distinctive sales process, you can discuss whether a ban on the entire business activity is necessary or whether restrictions on using information would suffice.

Understand Japanese law and your position as a franchisee

Japan has no single, comprehensive law dedicated to regulating all franchises. That does not mean franchising is unregulated. Article 11 of the Small and Medium-sized Retail Business Promotion Act requires franchisors operating a “specified chain business” under that Act to provide prospective franchisees with written information on prescribed matters and explain it before a contract is signed. Whether a non-compete obligation exists, and what it covers, are among the disclosure items to check.

Whether the Act applies is not determined simply by describing a business as retail or food service. It depends on statutory requirements, including ongoing supplies of goods or arrangements for their sale, management guidance, the use of trade marks and similar rights, and payments collected when joining.

The Japan Fair Trade Commission’s Guidelines Concerning the Franchise System under the Antimonopoly Act are also relevant to a wide range of franchise arrangements. Franchisees are businesses independent of the franchisor, and dealings between them are subject to the Antimonopoly Act. Restrictions on business activities that go beyond what is necessary may raise issues under the Act, depending on the parties’ bargaining positions and the particular circumstances.

The Civil Code also affects the validity of contractual provisions. A non-compete clause is not unlawful merely because it exists, but nor is every signed clause necessarily enforceable as written. Do not assume there is a uniform nationwide standard specifying an acceptable duration, geographical area or range of business activities. Seek advice from a lawyer before joining if the restrictions are broad.

List the activities, areas, periods and people covered

For each brand you are considering, divide the non-compete obligation into the following four categories to make differences in scope easier to see.

• Business activities: Does it cover only outlets selling the same products, or also similar services, distance selling and consultancy?
• Geographical area: Does it cover the area around your franchise outlet or the franchisor’s entire trading territory? How are online sales treated?
• Duration: Are the restrictions different during and after the agreement? When does the post-termination period begin?
• People covered and forms of involvement: Is only the franchise company bound, or must its representative also give a personal undertaking? Does the restriction extend to running another company, investing in one or working as an employee?

Clarify wording such as “similar businesses” and “direct or indirect involvement” by using specific examples. If, for instance, you are considering a food-service franchise but already sell food online, describe what you sell and ask whether that activity would be covered.

Where clauses refer to family members or separate companies, distinguish between who is bound as a party to the agreement and what conduct is prohibited for the franchisee personally. If family members are asked to sign a document, that document also needs to be reviewed separately.

Apply the restrictions to your business plans and negotiate exceptions

Simply asking “Can I have another business on the side?” may leave room for misunderstandings. List your current and planned activities, then tell the franchisor what each involves, where it takes place, when it will start and how you will be involved.

Activities to check include an existing sole-trader business, investment in another company’s outlet, joining another franchise brand, working in a family member’s shop and eventually setting up independently. Even if your plans are not firm, an option that matters to you is worth raising before you sign.

If you want to continue an existing business, identify it precisely and negotiate whether it can be recorded in the contract or a separate written agreement as an exception to the non-compete obligation. It is important not to sign on the strength of a representative’s verbal assurance that it will be fine.

If the franchisor’s prior consent is required, check where to apply, what documents are needed, the criteria used and how the decision will be communicated. Establishing whether consent can later be withdrawn, or whether adding products or incorporating your business requires a fresh application, can reduce avoidable complications after you join.

Also check what conditions would apply in return for an exception, such as not using confidential information or keeping customer data separate. The key question is whether the arrangement can protect trust within the franchise community while leaving you room to continue your other work.

Check the consequences of a breach before signing

When reviewing the clause, examine not only what is prohibited but also what happens if you breach it. Check whether it provides for termination, contractual penalties, damages or an application for an injunction to stop the competing activity. Also check whether the wording allows damages to be claimed in addition to a contractual penalty. Whether any particular claim would succeed depends on the agreement and the individual circumstances.

It also matters whether you will have an opportunity to establish the facts or remedy the situation if a breach is suspected. Even if you believe an activity is not competitive, a disagreement can still take time and money to resolve.

Gather the draft agreement, disclosure documents, relevant rules, your questions to the franchisor and its answers, and any agreed exceptions. Give the complete set to a lawyer experienced in franchise agreements. As a practical precaution, avoid signing a lease or ordering equipment for another potentially competing business before the review is complete.

Practical takeaway: Start by listing the work you want to continue and the future options you want to keep open, then compare them with the non-compete clause. Do not rely on verbal explanations for important exceptions: get them agreed in writing before signing.