Non-Compete Clauses in Taiwanese Franchises: Check Scope, Duration and Exceptions Before Signing

When considering a franchise in Taiwan, comparing brands and investment costs is only part of the process. You also need to understand what you are promising not to do. Non-compete clauses may affect an existing side business, other investments or plans to open a shop after the agreement ends. Rather than simply asking whether there are restrictions, break them down into clear terms you can check and negotiate.

1. Distinguish non-compete restrictions from confidentiality obligations

A non-compete clause typically restricts a franchisee from running, participating in or investing in a competing business. Confidentiality obligations govern the use and disclosure of information such as recipes and operational data. Both may apply, but they are not interchangeable: promising not to disclose information is not the same as promising never to run a similar shop in future.

Once you have obtained the full agreement and its appendices, look for terms such as ‘non-compete’, ‘similar business’, ‘direct or indirect participation’ and ‘related parties’. Then draw up two lists: one covering restrictions during the franchise term, and another covering obligations that survive expiry, termination or rescission.

Pay particular attention to the definition of ‘similar business’. For example, if you take on a drinks franchise, can you also run a breakfast café that serves drinks? Does simply holding shares in a listed company count as an indirect investment? The wording should answer these questions clearly. Do not rely solely on a franchise sales representative saying that the franchisor ‘would not normally pursue it’.

2. Understand Taiwan’s rules: a review period is not a right to cancel

Taiwan does have franchise-specific regulatory guidance. The Fair Trade Commission has issued its Disposal Directions (Guidelines) on the Business Practices of Franchisors, which operate alongside the Fair Trade Act. Questions about the validity and performance of agreements also involve the Civil Code. The Guidelines are not a standalone ‘Franchise Act’.

Under the Guidelines, the franchisor should provide material franchise information ten days before entering into a franchise or preliminary franchise relationship, or within a period considered reasonable in the individual case or agreed by both parties. This information includes operating restrictions during the agreement and the conditions and procedures for amendment, termination and rescission. As non-compete arrangements can affect your investment decision, ask the franchisor to explain them clearly in both the disclosures and the agreement.

Before signing, the franchisor should also allow at least five days to review the agreement, or a period considered reasonable in the individual case. This is an opportunity to examine the terms before signing, not a cooling-off period that lets you change your mind unconditionally afterwards.

A failure to comply with the relevant disclosure or contracting requirements under the Guidelines constitutes a breach of Article 25 of the Fair Trade Act only where it is sufficient to affect trading order. It does not automatically follow that a non-compete clause is invalid. Nor should franchisees assume that the rules governing employees’ post-employment non-compete restrictions apply directly to franchise agreements.

3. Break down the restrictions with four questions

Who is restricted? Does the clause cover the company signing the agreement, the person responsible for it, or spouses, shareholders and affiliated companies as well? Family members do not automatically become parties to the agreement simply because it mentions them. However, the agreement may make the franchisee responsible for ensuring that others do not compete. Have a Taiwanese lawyer review wording of this kind.

What is restricted? Ask for the restricted products, services and forms of involvement to be specified. Running a business yourself, taking employment, providing consultancy services and holding shares passively should not all be swept into a phrase such as ‘participation in any form’. If you already have another business, list it in an appendix and obtain a written exception.

Where does the restriction apply? Check whether it covers the area around the outlet, specified administrative districts or the whole of Taiwan. If the boundary is distance-based, the starting point for measuring that distance should be stated. For online shops, deliveries or orders from outside the area, clarify whether the test is the business address or the customer’s location. Otherwise, the practical restriction could be far wider than expected.

How long does it last? Separate restrictions during the agreement from those that apply after it ends, and specify what triggers the start of each period. Also ask whether the same restrictions apply if you terminate because the franchisor has breached the agreement. Do not assume that ‘it was not my fault’ releases you from compliance.

4. Put exceptions and approval procedures in writing

The aim of negotiation is not simply to remove every restriction. It is to strike a reasonable balance between the franchisor’s need to protect its brand and confidential information and the franchisee’s employment and investment options. You can ask for a narrower definition of competing business, a smaller geographical scope or a shorter duration, alongside express exceptions for existing businesses, non-competing work and passive investments.

If the franchisor insists on prior approval, the agreement should specify whom to apply to, what information you must provide, the response deadline and how approval will be given. Do not treat silence as consent or assume that one verbal permission covers all future activities.

Before signing, test the clause against three practical plans: continuing your existing side business, accepting a job with another brand and launching your own brand after the agreement expires. Ask the franchisor to respond to each in writing, and incorporate any agreed exceptions into the agreement or a formal appendix. Keep the disclosure documents, correspondence and all versions of the agreement.

Key takeaway: Do not accept a non-compete clause until you can clearly answer four questions: who, what business, where and for how long? If the restriction could cut off your main source of income, obtain advice on your specific circumstances from a Taiwanese lawyer before deciding whether to join.