Non-compete clauses in franchise agreements: what to check before buying

Buying a franchise can restrict not only how an entrepreneur runs the new outlet, but also their own future ventures. A non-compete clause may affect an existing business, investments in other companies and business activities after the agreement ends. In franchising, these restrictions help protect the brand’s interests, but buyers need to understand their scope and economic cost in advance.

What Russian law allows agreements to restrict

Commercial concession arrangements — the legal framework used for franchising in Russia — are governed by Chapter 54 of the Russian Civil Code. Article 1033 expressly permits an obligation on the franchisee not to compete with the rights holder within the territory covered by the agreement, in relation to the business activities the franchisee conducts using the exclusive rights granted. It also allows the franchisee to undertake not to obtain similar rights under commercial concession agreements from the rights holder’s competitors or potential competitors.

These are different restrictions. The first concerns competing business activities; the second concerns acquiring a similar franchise. Wording such as ‘you may not work with competitors’, without further explanation, is therefore insufficient to assess the risk: you need to establish exactly which actions are prohibited.

Article 1033 does not, however, mean that every restriction is automatically lawful. It allows restrictive provisions to be declared invalid at the request of the competition authority or another interested party if, taking account of conditions in the relevant market and the parties’ economic position, they breach competition law. Federal Law No. 135-FZ ‘On the Protection of Competition’ is particularly relevant here.

Do not assume you can sign up to an excessive restriction and then easily have it overturned. The legal assessment depends on the wording and the circumstances. It is wiser to agree workable limits before the transaction than to build a business on assumptions about a future court ruling.

How to establish exactly what counts as competition

Ask the seller to identify every restriction in the draft agreement and its schedules. These may appear not only in the non-compete section, but also among the franchisee’s obligations, the provisions triggering contractual penalties and the rules for approving new ventures.

Check five points:

• Activities. Which goods, services and business formats fall within the restriction?
• Territory. Does the restriction apply to the area around the outlet, the city or another defined territory?
• Involvement. Does it prohibit you from directly managing a competitor, holding a stake in it, advising it or providing premises for it?
• Duration. When does the obligation begin and when does it end?
• Exceptions. Which existing ventures and permitted investments are excluded from the restriction?

For someone buying a bakery franchise, for example, a ban on opening another bakery has very different consequences from a ban on involvement in any food service venture. The broader the definition of a competitor, the more independent ventures will require approval.

Consider online sales separately. If the agreement prohibits competition in a particular city, it should be clear whether this covers deliveries into that city from elsewhere, advertising aimed at its residents or simply having a publicly accessible website.

Treat phrases such as ‘any similar activity’ and ‘direct or indirect involvement’ with caution if they are not defined anywhere. Suggest replacing abstract terms with objectively verifiable criteria. A list of specific brands can supplement the definition of a competitor, but it is also important to establish how that list may be amended.

How to protect your existing business and future investments

Before negotiations, draw up an overview of your business interests: companies you are involved in, ventures in preparation, consultancy agreements and investment commitments. Compare this with the restriction rather than checking only the future outlet’s core activities.

If you already have a similar business, a manager’s verbal consent is not enough. Propose a schedule to the agreement setting out exceptions: the company name, the nature of its activities, outlet addresses and the permitted scope for developing the venture. Clarify whether relocation, expansion of the product range and additional outlets are allowed.

For new ventures, a written approval procedure is useful. It should specify what an application must contain, where it must be sent, the response deadline and the grounds for refusal. If the parties want a failure to respond to count as consent, they must state this expressly: the franchisor’s silence should not, in itself, be treated as permission.

Also check references to relatives, employees, shareholders and associated companies. As a general rule, an agreement does not impose obligations on people or entities that are not parties to it. It may, however, impose obligations on the franchisee concerning certain actions by those people or entities. A broad undertaking to ‘ensure that no affiliated person or entity competes’ needs a separate legal assessment: can you actually control compliance with it?

How to assess the duration and economic cost of the restriction

Distinguish between restrictions that apply during the agreement and those that apply after it ends. Do not automatically assume that Article 1033 applies to every post-termination restriction. Whether a non-compete obligation after the relationship ends is permissible and enforceable requires a separate analysis of the agreement’s wording and the circumstances.

Do not confuse such a restriction with the protection of intellectual property rights. Ending the relationship does not give you permission to continue using someone else’s trade mark. Confidentiality obligations may also survive termination. Neither, however, is the same as a ban on running a similar business under your own brand.

Calculate the practical consequences of the restriction: which ventures you would have to abandon, whether you could repurpose the premises and how much your choice of future partners would narrow. Clarify what counts as a separate breach and whether a contractual penalty applies once or accrues daily. The possibility that a court might reduce a penalty is no substitute for assessing the risk in advance.

Practical takeaway: before buying, obtain clear answers to four questions: what is prohibited, where, for how long and with what exceptions? If the restriction affects your existing business, record the permission in the documents you sign rather than leaving it as something discussed during negotiations.