Franchising in Taiwan: Setting Reasonable Non-Compete Restrictions to Protect Brands and Franchisees

When opening an existing business in Taiwan to franchising, a franchisor may worry that franchisees will learn its operating methods and then set up similar shops of their own. Yet a blanket clause stating that franchisees “must not operate any similar business” may do little to protect the brand and could make it harder to establish a working relationship. Within a franchise network, reasonable non-compete restrictions should protect specific interests, rather than broadly prevent franchisees from earning a living in future. This article focuses on making those restrictions clear and proportionate, and preparing them before recruitment begins.

1. Identify what needs protecting before deciding whether to restrict competition

Franchisors should start by listing the actual risks, rather than copying another brand’s agreement. The interests requiring protection might include confidential operating methods, customer relationships built through substantial investment, or conflicts of interest arising when a franchisee also operates a competing brand during the agreement. Different risks call for different tools.

For example, if the concern is that an outlet will continue using the brand’s logo after leaving the network, the first step is to address the termination of its trade mark licence and the removal of branding. If the concern is disclosure of internal information, strengthen confidentiality obligations and arrangements for returning information. A non-compete clause cannot solve all these problems, nor should a franchisor assume that all the general skills a franchisee acquires while running the business belong to the franchisor.

Consider creating an internal assessment sheet that answers four questions for each restriction:

• Which specific interest needs protecting?
• What information or resources will the franchisee have access to?
• Would confidentiality obligations, prohibitions on unauthorised use of the brand and similar measures be sufficient on their own?
• If a non-compete restriction is still necessary, what is the narrowest scope required?

If the franchisor cannot explain how a restriction addresses a risk, it should narrow the clause rather than increase the penalties for breach.

2. Separate restrictions during the agreement from those after exit

Non-compete arrangements during the franchise relationship generally focus on avoiding conflicts of interest. The agreement should address separately whether a franchisee may operate a directly competing brand, take a management role at a competing outlet, or use the franchised outlet’s staff and equipment for another brand.

Post-exit restrictions require a separate assessment. The former franchisee will no longer be using the brand and may still need to earn a living, so restrictions that apply during the relationship should not simply be extended unchanged. At a minimum, the clause should clearly specify four elements:

• Business scope: Define direct competition by reference to core products, services or operating models, rather than imposing a blanket ban across the entire food service or retail sector.
• Geographical scope: Explain how the restriction relates to the original outlet’s customer catchment or actual trading area. It should not automatically cover all of Taiwan merely because the brand has expansion plans.
• Duration: Assess the period needed in light of the value of the information, customer relationships and other specific needs. No fixed duration should be treated as automatically valid.
• Restricted activities: Distinguish between operating a business, management, consultancy and purely passive investment. Avoid also prohibiting small shareholdings that carry no control.

Who is subject to the restriction matters just as much. If the contracting party is a company, adding “including all relatives and connected persons” does not mean that people who have not signed the agreement are equally bound. Where a separate undertaking from the person responsible for the business is genuinely needed, a Taiwanese lawyer should review its necessity, signing arrangements and legal effect.

3. Review the restrictions under Taiwanese law: a signature does not guarantee validity

Taiwan has no single dedicated statute governing franchising, but that does not mean franchises are unregulated. The Taiwan Fair Trade Commission’s principles for handling cases involving franchisors’ business practices are an important basis for its approach. Franchise arrangements are also subject to general legislation, including the Fair Trade Act and the Civil Code.

Non-compete restrictions form part of the restrictive conditions of a franchise relationship. Franchisors should clearly disclose the relevant material information before entering into the agreement and, in accordance with the Commission’s principles, allow at least five days for contract review. They should not promise applicants “freedom to leave” during recruitment, only to introduce sweeping non-compete provisions at the final signing stage. Concealing material transaction information may, where the relevant legal requirements are met, constitute deceptive or obviously unfair conduct under Article 25 of the Fair Trade Act.

Civil enforceability must be assessed separately. A court’s assessment may turn on whether a clause is contrary to public order or good morals, whether it is a manifestly unfair standard-form provision, and whether the restriction goes beyond what is needed to protect the relevant interests. A court may also reduce an excessive contractual penalty, so a large stipulated sum should not be treated as compensation that will necessarily be recoverable in full.

Nor does a franchisee become an employee simply by accepting guidance from the franchisor. Do not copy post-employment non-compete clauses directly from employment contracts, or treat the Labour Standards Act’s requirements for employee non-competes as a universal test of validity for franchise agreements. If a separate employment relationship actually exists, it must be examined separately.

4. Establish disclosure and exception procedures that work in practice

During recruitment, applicants can be asked to disclose existing competing businesses, management roles and investments that may create conflicts of interest. The franchisor can then assess each item individually. Information collection should be limited to what is needed to assess those conflicts; applicants should not be asked for family financial information unrelated to the proposed relationship.

The agreement can include a written procedure for exceptions, specifying what an application must contain, who is responsible for approval, how decisions will be communicated and any conditions attached to approval. For example, if an applicant already owns a shop selling different products, the franchisor can assess customer overlap, shared resources and access to information, rather than deciding on the shop’s name alone. Every exemption should be documented to avoid a recruiter making a verbal promise that the operations team knows nothing about.

Before formally launching the franchise offer, test the clauses against several scenarios. Would a franchisee’s shareholding in a listed company be restricted? Would employment at another shop after exit be prohibited? Could an existing side business continue? If different people within the franchisor’s organisation give different answers, the wording still needs revision.

Practical takeaway: First state clearly which interests need protecting, then define the business activities, geographical area, duration and people covered. Having a Taiwanese lawyer review the non-compete provisions against the actual business model, and explaining them openly during recruitment, will do more to build a stable franchise network than relying on a blanket prohibition.