Non-Compete Clauses In Franchising Agreements – Use And Limitations

International Law Office:

Introduction
Franchisors usually include a non-compete clause in their franchise agreements which obliges the franchisee not to operate a business that is identical or similar to the franchisor’s business, both during the term of the agreement and for a certain time thereafter. Such clauses are intended to prevent a franchisee from (i) misappropriating the trade secrets or know-how disclosed during the franchise agreement, or (ii) exploiting the customers or markets acquired through the franchise. However, non-compete clauses may be deemed an excessive restraint of rights, including the franchisee’s freedom to choose its occupation and operate its business. As a result, they are not always regarded as valid or enforceable according to their terms.

Key case law
A Kobe District Court decision exemplifies the considerations in such cases.(1)The franchisee processed and sold takeaway lunches pursuant to a franchise agreement. A dispute arose as to the validity of the franchise agreement’s non-compete clause after termination of the franchise agreement. The clause stated: “[The franchisee] shall not operate any business in the same category as the franchisor’s business in the location where the franchisee operates its business under the agreement.”

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