Non-competition clause

The purpose of the non-competition clause inserted in a franchise agreement is to prohibit the franchisee from exercising, that is to say creating, participating or being interested, directly or indirectly, by himself or by an intermediary, in the operation of any activity competing with that of the network.

 It differs from the non–affiliation clause which only prohibits the franchisee from joining a network competing with that of its franchisor.

Two types of non-competition clauses may be charged to the franchisee in its franchise agreement:

 –          non-compete during the term of the franchise agreement;

–          non-compete for a specified period of time from the date of termination of the effects of the franchise agreement.

Find here an article published in LSA on the usefulness of the non-compete clause.

Such an obligation, whether contractual or post-contractual, constitutes a restriction on the franchisee’s freedom of enterprise and freedom of competition and must therefore, in order to be valid, comply with the conditions of validity imposed by national law or Community law where applicable.

Since Community law is applicable to the franchise contract, the non-compete clause must not constitute a prohibited cartel or an abuse of a dominant position and must therefore comply with the conditions of validity laid down by Community Regulation No330/2010 of 20 April 2010.

The non-compete clause applicable during the execution of the franchise agreement must, in order to be valid, not be longer than five years.

The conditions of validity of the post-contractual non-competition clause are, under Community law, more stringent. Such a clause will be considered lawful if it:

–          “concerns goods or services in competition with the contractual goods or services“;

–          is limited to “the premises or land from which the buyer has carried out its activities during the term of the contract“;

–          is limited to “one year from the expiry of the agreement“;

–          is “essential to the protection of know-how transferred by the supplier to the buyer“.

Failing to comply with the conditions of the aforementioned Regulation No.330/2010, the non-competition clause is considered to have an anti-competitive effect. It is then up to the franchisor to demonstrate the beneficial effect for competition of such a clause.

You can also read an article here about the fact that a non-compete clause must be proportionate to the franchisor’s legitimate interests.

Since the franchise contract does not fall within the scope of Community law, the non-compete clauses inserted therein must comply with the validity requirements of national law.

The conditions of validity of these clauses do not appear in French law but have been established over the course of court decisions. The non-competition clause, contractual or post-contractual, must, in domestic law:

–          be limited in time;

–          be limited in space;

–          protect a legitimate interest: in franchise law, the franchisor’s legitimate interest will be considered to be the protection of its know-how;

–          be proportionate to the purpose of the contract

In the event of non-compliance with the conditions of validity of these clauses, the French judge may declare the nullity of the clause.

On the other hand, both Community law and French law do not make the payment of compensation to the franchisee, in return for its commitment to non-compete, a condition of validity of these clauses.

Such an obligation on the part of the franchisee is not a matter of public policy and must arise from the terms of the franchise agreement. It is therefore essential, for the franchisor who wishes to protect its know-how and the business concept it has developed, to include such clauses in its franchise agreements.

See here all our publications on the clauses of the distribution contract.

We draw your attention to the fact that the Macron law of 6 August 2015 amended the provisions applicable to the validity of non-competition clauses.