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.

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Author: Katarzyna Menszig-Wiese LL.M., PhD