Non-compete clauses in franchising: what’s enforceable?

Almost every franchise agreement stops you competing with the network while it runs, and most go further and stop you running a similar business for a period after it ends. That post-term restriction is the one that can hurt. If the franchise ends, you may have built a business, a customer base and a local reputation that you can’t use. Whether the clause can actually be enforced depends on two separate bodies of law, and a clause has to survive both.

Why franchisors use them

The franchisor has given you its know-how, its methods and the use of its brand, and customers in your area associate your outlet with that brand. Without a restriction, a departing franchisee could carry on the same business from the same premises under a new name, taking the goodwill with it and making it hard to re-franchise the area. That is a real interest the law recognises. The question is how far the restriction can go to protect it.

The restraint of trade doctrine

Under English law a restriction on someone’s freedom to trade is unenforceable unless it protects a legitimate interest and goes no further than is reasonably necessary to protect it. Reasonableness is judged on the wording of the clause as it stood when the agreement was signed, looking at how long it lasts, the area it covers and the activities it restricts. Courts tend to be more willing to uphold restrictions in franchise agreements than in employment contracts, because the parties are both businesses and the franchisor’s interest in its know-how and the goodwill of the territory is easier to identify.

There is no fixed period or distance that is always acceptable. Each clause is judged on its own facts. A court will not rewrite an unreasonable clause to make it reasonable, although it may be able to strike out an offending part and enforce the rest if the wording allows that.

Competition law and the vertical agreements block exemption

Non-compete obligations can also fall within the Chapter I prohibition in the Competition Act 1998. Franchise agreements can benefit from the Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022, provided neither the franchisor’s nor the franchisee’s market share exceeds 30%. The Order does not cover a post-term non-compete unless all of these conditions are met:

• it relates to goods or services that compete with those covered by the franchise
• it is limited to the premises and land from which you operated during the agreement
• it is indispensable to protect know-how the franchisor transferred to you
• it lasts no more than one year after the agreement ends.

Separately, a restriction on using or disclosing know-how that hasn’t entered the public domain can last indefinitely.

Many franchise agreements go wider than this, for example by covering your whole territory or lasting longer than a year. That doesn’t automatically make the clause unlawful. It means the clause loses the safe harbour and would need to be justified on its own terms under competition law, while the rest of the agreement can still benefit from the Order. The Competition and Markets Authority’s guidance also says that provisions strictly necessary for franchising to work can fall outside the prohibition altogether. Its examples are restrictions stopping you using the franchisor’s know-how for the benefit of its competitors, and non-competes on the goods or services you buy that are needed to keep the network’s common identity and reputation, for no longer than the agreement itself. Where the line falls in a given case is a question for specialist advice.

What to negotiate

Start with length and area. A post-term restriction limited to one year and to your former premises sits within the block exemption, which gives you a reasonable basis for asking for that if the draft goes further. Ask for a narrow definition of “competing business” that matches what you actually did under the franchise, and carve out any business you ran before you joined. Look at whether the restriction applies however the agreement ends. It is fair to ask that it falls away if the franchisor ends the agreement without fault on your part or refuses to renew when you have complied with it.

If the franchisor tries to enforce it

A franchisor can claim damages for breach and, more usually, ask the court for an injunction to stop you trading. It may apply for an interim injunction quickly, before the full arguments are heard, so the practical pressure can be considerable even where the clause is open to challenge. Relying on a court to strike down an unreasonable clause later is expensive and uncertain, so negotiating it before you sign is far better.

Upload your franchise agreement to QuickLegalCheck and the report will flag post-term restrictions that look wide and the points worth raising before you sign.