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Franchisors commonly include non-compete clauses within franchise agreements. These clauses usually stipulate that a franchisee is not allowed to open another business in the same industry for the duration of the franchise agreement and for a specified time afterwards. This article will explain non-compete clauses and, in doing so, highlight the importance of thoroughly reading and understanding your franchise agreement.
What is a Non-Compete Clause?
Non-compete clauses are a form of restrictive covenant. A restrictive covenant is a clause in a contract that prevents somebody from doing something. Franchisors use non-compete clauses to prevent franchisees from operating another business within the same industry for:
- the period of the franchise agreement; and
- a specified time after the contract has ended.
The specific phrasing of a non-compete clause will vary across different franchises and industries. For example, a fast-food franchisor may write a non-compete clause that prevents franchisees from opening another fast-food business for the duration of the agreement and 12 months following its termination.
Below we explore three key considerations regarding non-compete clauses in franchise agreements.
1. Balancing Interests
Franchisors do not want to share all their knowledge with franchisees for them to open a competing business. In this respect, non-compete clauses help franchisors protect their legitimate business interests. Beyond non-compete clauses, there are additional ways that franchisors seek to protect their interests. These include:
- limiting the franchisee’s use of their trade marks;
- confidentiality agreements; and
- setting clear quality standards.
Franchisees gain vast experience in the industry they operate within. They may want to open a competing enterprise in that industry should they leave their franchise, but a non-compete clause may prevent your entrepreneurial freedom.
To some extent, the franchise relationship involves diverging interests. It is in the franchisor’s interests that restrictions are in place, but it is in the franchisee’s interest that these restrictions are as narrow as possible. This is a crucial reason why it is essential that franchisees seek legal advice and respectfully negotiate the franchise agreement.
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2. Seeking Legal Advice
It is crucial to thoroughly examine the franchise agreement before signing it. A non-compete clause will impose restrictions on how your business operates in the present, as well as impacting your future business plans. Therefore, seeking independent legal advice at the stage of signing the franchise agreement can be invaluable.
Breaching a non-compete clause will also mean you are in breach of the franchise agreement, which can lead to a legal dispute. The complexity of non-compete clauses and their potential legal consequences means that franchisees and prospective franchisees should seek legal advice.
Nevertheless, recent UK case law has shown that unreasonable post-termination restrictions within franchise agreements may be unenforceable. A court will determine whether a non-compete clause is enforceable on the specific facts of each case. If you require guidance about non-compete clauses within your franchise agreement, seek legal advice. A lawyer will:
- read through the franchise agreement;
- help you determine the actions you can or cannot take; and
- guide you through the best course of action.
3. Negotiating Non-Compete Clauses
Franchisors may be open to negotiating the scope of a non-compete clause. Aspects of non-compete clauses you may negotiate as a prospective franchisee include:
- its duration;
- the industrial scope; and
- the geographic area of the restriction.
You may propose a shorter timeframe for the restriction or specify a particular type of business that is to be covered by the non-compete clause rather than allowing it to have industry-wide coverage. Alternatively, you may suggest that the restriction has a narrower geographic range. Either way, it is important that you negotiate the specifics of the clause to safeguard your business interests.
This handbook covers all the essential topics you need to know about franchising your business.
Key Takeaways
In franchising, non-compete clauses prevent the franchisee from taking staff from their franchise into a new business and opening a competing enterprise within the same industry for a specific period. A franchisor puts such clauses in place to protect their business interests. On the other hand, it is in a franchisee’s interest that the scope of each non-compete clause is as narrow as possible to allow their business to flourish. A breach of any clause in the franchise agreement can lead to legal action. For these reasons, seeking legal advice about restrictions the franchisor has written into the franchise agreement can be valuable to franchisees.
If you need help understanding your franchise agreement, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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