Non-compete clauses in franchise agreements in Slovenia

When preparing to expand an existing business into a franchise network, you want to prevent a partner from using your know-how to set up a directly competing business. But a non-compete clause is not an unlimited safeguard. Before signing your first agreement, you need to define what you are actually protecting, which activities you are restricting and for how long. An overly broad clause can make it harder to recruit partners and create legal complications just when you need to rely on it.

1. First, identify the competition you want to restrict

Do not start by stating that the franchisee must not engage in ‘any similar activity’. First, describe the products or services that compete directly with your offering. For a specialist fitness franchise, for example, it should not be taken for granted that the restriction needs to cover every other activity related to wellbeing.

Prepare a brief risk assessment. For each risk, identify the specific conduct, the commercial harm you want to prevent and the least restrictive measure that would adequately address it. Distinguish between:

• operating a directly competing outlet;
• using transferred business know-how in another project;
• disclosing confidential instructions to a third party;
• making a passive investment in another company without influencing its operations.

These activities are not equivalent, and it makes little sense to address them through a single blanket prohibition. Protecting confidentiality and restricting business activities serve different purposes. If a prohibition on using particular confidential know-how resolves the issue, a complete ban on other business activities may not be necessary.

Also check the prospective franchisee’s existing activities. Record any permitted exceptions in the agreement rather than leaving them in emails or an oral arrangement.

2. Take Slovenian and EU competition law into account

Slovenia has no specific franchising act, compulsory franchise register or specific statutory franchise disclosure document. A franchise agreement is an innominate contract: one not specifically regulated as a distinct contract type. It is governed by the general rules of the Slovenian Obligations Code (OZ), including the principle of good faith and fair dealing and the limits on freedom of contract.

The Prevention of Restriction of Competition Act (ZPOmK-2) is relevant to non-compete clauses. Where an agreement may affect trade between Member States, Article 101 of the Treaty on the Functioning of the European Union is also relevant. The fact that you are opening only one outlet in Slovenia does not, in itself, rule out the application of EU rules.

Commission Regulation (EU) 2022/720 provides a block exemption for certain vertical agreements. In simple terms, it can give an agreement a safe harbour under competition law if all the conditions are met. These generally include the supplier’s and buyer’s market shares not exceeding 30 per cent on their respective relevant markets, and the absence of hardcore restrictions.

This is not automatic approval of every franchise agreement. Equally, exceeding the threshold or excluding a particular obligation from the block exemption does not automatically make it unlawful: an individual assessment is required. You should therefore give your lawyer a description of how the business actually operates, not just a draft clause.

3. Distinguish between restrictions during the agreement and after it ends

During the agreement, it may be important to prevent a partner from running a competing outlet while receiving your know-how and support. However, the scope of the restriction should reflect the actual offering and the needs of the franchise network.

Under Regulation 2022/720, non-compete obligations of indefinite duration or lasting more than five years are generally excluded from the block exemption. There are exceptions, including for certain premises owned or rented by the supplier. For tacitly renewable obligations, an important consideration is whether the buyer can effectively renegotiate or terminate the relationship after five years on reasonable terms. The five-year period is therefore not a simple, universal limit on the validity of every franchise clause.

The block exemption conditions are stricter for restrictions that apply after the agreement ends. The restriction must concern competing products or services, be limited to the premises and land from which the partner operated, be indispensable to protect transferred know-how and last no more than one year. All these conditions must be met together.

A one-year ban covering the whole of Slovenia therefore does not meet these conditions merely because it lasts only one year. In franchising, it is also necessary to assess which restrictions are genuinely necessary to protect transferred know-how and the network’s common identity and reputation.

4. Draft a clause that works in practice

The draft should clearly identify who is bound by the clause, the prohibited activity, its duration, its territorial or premises-based scope, and any permitted exceptions. An agreement with a company does not automatically bind all its owners or their family members. If you need additional undertakings, ask a lawyer to check their legal basis and proportionality.

Set out a procedure for notifying you of a new business activity and obtaining written consent. The partner should know whom to send the project description to, what supporting documents to include and when to expect a response. This allows you to resolve a disagreement before it becomes a breach.

If you include a contractual penalty, check its permissibility and amount under the Obligations Code. A large penalty does not remedy an impermissible restriction; a court may reduce a disproportionately high penalty at the request of the party liable to pay it.

Practical takeaway: before launching your first franchise, map out the competitive risks and choose a narrowly tailored, justified safeguard for each one. Then ask a lawyer to assess restrictions during the agreement separately from those that apply after it ends.