In midsummer, a new legislative proposal concerning franchising agreements emerged, causing concern for many franchisors. Although some of the most controversial ideas were dropped, the final version of the bill does not seem to recognize the risks involved in limiting the use of non-compete clauses in such agreements.
A non-compete clause is a standard clause in a franchising agreement, and can be applicable during and after termination or discontinuation of the legal relationship. A clause of this kind is intended to prevent the know-how of the franchisor disclosed to the franchisee being used for purposes other than agreed. If there is no non-compete clause, the franchisee could use the know-how to develop its own competing business or start such a business the day after termination. For obvious reasons, this risk is unacceptable for franchisors. In addition, the use of non-compete clauses is – under certain conditions – permitted in vertical agreements despite possible competition law concerns. This shows the significance of the clause in question.
The proposal includes a provision that limits the use of a non-compete clause, stating that the obligation imposed on the franchisee can only cover founding a competing franchise for one year after the termination or discontinuation of the franchise agreement. A non-compete clause of this scope does not provide effective protection for the interests of a franchisor, and does not prevent the franchisee from starting up a competing business straightaway upon terminating their franchise agreement, as long as their own business is not a franchise. Hopefully, this loophole will be remedied in the legislative process.
Author: Katarzyna Menszig-Wiese LL.M., PhD