Non-compete clauses in franchising: how to set their limits

When expanding an established business through franchising, you may worry that a franchisee will use the model they have learnt to open a competing outlet. A non-compete clause can be a legitimate safeguard, but it should not cover every business activity the franchisee undertakes. A franchise network needs boundaries that both sides understand. Before entering into your first agreement, identify what genuinely needs protection and how far restrictions on an independent business owner should extend.

1. Start with the risk, not a template clause

First, describe the situations you want to avoid. A franchisee running an outlet with an almost identical offering is quite different from holding a small shareholding in a company operating in a similar market. A blanket clause prohibiting “any competing activity” does not explain that distinction and may lead to disputes.

Draw up a brief risk map covering:

• products or services that customers see as substitutes for your offering;
• the area in which outlets actually compete for customers;
• the franchisee’s role in another venture: owner, manager, adviser or passive investor;
• access to knowledge that could make it easier to copy the concept.

Do not treat a PKD code — Poland’s business activity classification code — as a definitive measure of competition. The description of activities in a business register may be much broader than the services actually provided. The actual offering and how it is sold are better points of reference.

Also distinguish non-compete obligations from confidentiality. The former restrict particular activities; the latter protects information. A duty of confidentiality does not automatically prohibit someone from running a similar business. Equally, a broad non-compete clause is no substitute for identifying which information you share with the franchisee is confidential.

2. Check the Polish and EU legal framework

Poland has no separate statute comprehensively governing franchising. A franchise agreement remains an unnamed contract — one without a dedicated statutory framework — governed primarily by the Polish Civil Code. Freedom of contract under Article 353¹ allows the parties to agree their obligations, but does not permit terms that conflict with legislation, the nature of the legal relationship or the principles of social coexistence.

Non-compete clauses are also subject to Poland’s Act on Competition and Consumer Protection and, where applicable, European Union law. Both the purpose of the restriction and its scope, duration and market context require assessment. A franchisee’s signature does not make every restriction lawful.

Commission Regulation (EU) 2022/720 is important when assessing vertical agreements. It sets out the conditions under which certain agreements are exempt from the prohibition on anti-competitive agreements. However, it is neither a franchising statute nor automatic approval of an entire agreement. Non-compete obligations require separate assessment, and failure to meet the exemption conditions does not, in itself, automatically invalidate every clause.

Do not copy provisions from the Polish Labour Code either: a franchisee is an independent business operator, not an employee of the franchisor. Draft amendments to the Civil Code presented in 2023 included proposals concerning franchising, but legislative proposals should not be presented as law in force. Before adopting a template agreement, have the current legal position checked.

3. Define obligations during and after the agreement separately

During the agreement, a restriction may help protect the shared concept and prevent conflicts of interest. Even so, it should reflect genuine needs. A clause covering all of a franchisee’s food-service ventures will require a different justification from a ban on operating a directly competing outlet with a similar offering.

Answer four questions when drafting the clause:

1. Who is bound by the obligation? Identify the party to the agreement. Do not assume that a company’s signature automatically binds all its shareholders or their family members personally.
2. Which activities does it cover? Distinguish between operating an outlet, managing a competitor and holding an equity stake.
3. Where does it apply? Link the geographical scope to the business justification, rather than automatically covering the whole country.
4. How long does it last? Separate the term of the agreement from any restriction that applies after it ends.

A post-termination non-compete obligation requires particularly careful analysis. The EU block exemption sets strict, cumulative conditions for such a restriction, including that it must be indispensable to protect transferred know-how, be limited to the premises and land from which the business operated, and last no more than one year. Simply specifying twelve months is therefore not enough to meet the exemption conditions.

Do not present a non-compete clause as a way to retain a franchisee at all costs. Its purpose should be to safeguard legitimate interests, not to prevent a business owner from continuing to earn a living.

4. Establish a process for exceptions and compliance checks

Before signing the agreement, ask the prospective franchisee to describe any existing ventures that might conflict with the proposed restriction. This allows you to resolve uncertainties early, rather than discovering a conflict after the outlet opens. Record agreed exceptions precisely, identifying the specific activity and the limits of the consent given.

Designate someone to handle questions about franchisees’ new ventures. Set out how enquiries should be submitted, what information is required and the deadline for a response. A failure to reply should not inadvertently amount to consent or leave the franchisee unable to make a decision.

Test the draft against practical scenarios: a passive investment, an additional online shop and a business already operating before the franchisee joined the network. If the answers are unclear, refine the definitions before recruiting franchisees.

Practical takeaway: prepare a risk map, define the scope of the restriction and list any exceptions, then submit them to a lawyer for review. The best clause protects a specific interest while allowing the franchisee to understand the limits of their freedom from the outset.