Franchising in Portugal: setting limits on non-compete clauses

When turning an existing business into a franchise network, it is natural to want to prevent the knowledge you share from being used to create a competitor. However, an overly broad prohibition can unnecessarily restrict the franchisee and create legal risks for the franchisor. Before including a non-compete clause in the agreement, identify what needs protecting, for how long and through which legal mechanism.

1. Identify the interest that deserves protection

The first question should not be ‘how can we stop the franchisee working in this sector?’, but ‘what legitimate interest would be exposed without this restriction?’.

This may involve confidential operational knowledge, shared through training and support, that would enable someone to reproduce a substantial part of the concept. Simply referring in general terms to the brand’s experience or to practices already familiar to any professional is not enough.

Prepare an internal briefing covering three points:

• Knowledge shared: processes, methods or combinations of procedures that are not generally known or readily accessible.
• Specific risk: how running a competing business at the same time could compromise that knowledge or the operation of the franchise model.
• Less restrictive alternatives: confidentiality obligations, controlled access to documentation and a prohibition on misuse of the brand.

These measures serve different purposes. Confidentiality protects sensitive information; a non-compete obligation restricts an economic activity. They should not be treated as interchangeable or automatically imposed together. If a confidentiality obligation adequately addresses the problem, an additional prohibition may be unnecessary.

2. Understand the rules that apply in Portugal

Portugal has no specific law governing franchise agreements. A franchise agreement is an atypical contract, subject to the freedom of contract established by Article 405 of the Portuguese Civil Code, within legal limits. Duties of good faith during negotiations and performance also apply, as does the standard contract terms regime under Decree-Law No. 446/85 where terms are drafted in advance without individual negotiation.

Freedom of contract does not override competition law. Relevant provisions include Law No. 19/2012 and, where the applicable conditions are met, Article 101 of the Treaty on the Functioning of the European Union.

Regulation (EU) 2022/720 provides a block exemption for certain vertical agreements. Broadly speaking, it requires the supplier’s and buyer’s market shares each to be no higher than 30% in the relevant markets, alongside compliance with the other conditions. Being below that threshold does not make every clause permissible.

The European Code of Ethics for Franchising is a self-regulatory instrument, not Portuguese law. Its binding effect depends on the relevant association membership or commitment to comply with it; it does not replace a legal assessment of the agreement.

3. Distinguish between the contract term and the period after it ends

During the agreement, a non-compete obligation may seek to prevent the franchisee from running a competing concept alongside the franchise. The wording should identify the activities covered rather than impose a blanket ban on any involvement in related businesses.

Under the general framework of Regulation (EU) 2022/720, non-compete obligations of indefinite duration or lasting more than five years are, in principle, excluded from the block exemption. Specific provisions concerning renewal and premises made available by the supplier require a separate assessment.

Franchising also calls for a distinct assessment of restrictions necessary to protect know-how and the network’s common identity. Therefore, five years is not a universal limit on validity, and falling outside the exemption does not automatically make a clause unlawful. An individual assessment may be necessary.

After the agreement ends, the conditions for exemption are narrower. The restriction must meet all the relevant requirements, including:

• Relating to goods or services that compete with those covered by the agreement.
• Being limited to the premises and land from which the franchisee operated during the agreement.
• Being indispensable to protect the know-how transferred.
• Lasting no more than one year after the agreement ends.

A nationwide ban on working in the sector does not meet that territorial condition. Restrictions on the use and disclosure of know-how that has not entered the public domain are a separate matter.

4. Prepare the clause before recruiting franchisees

Give your lawyer the risk briefing, the proposed contract term and a precise description of the activities covered. Ask them to distinguish between obligations that apply during the relationship and those that apply afterwards, and to check that the consequences of a breach are proportionate.

Explain the restriction to the prospective franchisee before signing. Portugal does not require a disclosure document or cooling-off period specifically for franchising, but the general duties of good faith and disclosure still apply. A significant restriction on the candidate’s future business activities should not come as a surprise.

Also review who will be bound: an obligation undertaken by the franchisee company does not automatically bind all its shareholders or their family members.

Practical conclusion: start by protecting specific knowledge. Only then define a restriction on business activities, with a justified scope and duration, and have it legally reviewed before recruiting franchisees.