Pursuant to the Explanation of the Fair Trade Commission on the Regulation of the Operating Behavior of Franchisors (hereinafter, the "Explanation"), the so-called "franchisor" refers to an enterprise that licenses its trademark or operating techniques, assists or guides the operation of franchisees based on the relationship of franchise operation and out of the consideration paid by the franchisees, whereas a "franchisee" refers to another enterprise that uses the trademark or operating techniques provided by the franchisor, accepts the franchisor's assistance or guidance and pays certain consideration to the franchisor based on the relationship of franchise operation. In practice, when a franchisor seeks to enter into a franchise agreement with a trading counterpart aspiring to become a franchisee, non-competition clauses are often added in the franchise agreement upon execution to stipulate the obligation not to compete in order to prevent the franchisee who has obtained know-how and trade secrets from becoming a competitor immediately after the agreement is terminated. Such obligation not to compete includes the prohibition against the franchisee's certain competitive acts in specific areas and for specific time periods.

The Explanation mentioned above does not address issues relating to the validity of non-competition clauses in a franchise agreement. Reference can be made to the Tai-Lao-2-0036255 Circular of 2000 from the Ministry of Labor (previously the Council of Labor Affairs of the Executive Yuan), which indicates the position of the competent authorities regarding non-competition clauses in general labor contract as follows: "Although non-competition clauses contained in labor contract are not prohibited under existing laws and regulations, still the provisions of such contractual clauses will be invalid if they are obviously unfair pursuant to Article 247-1 of the Civil Code." The circular also summaries the following principles considered by courts when they render decisions on disputes concerning the validity of non-competition clauses:

  1. An enterprise or employer should have interest that should be protected under the special non-competition covenant;
  2. The worker should hold a certain title or position at the enterprise of the original employer;
  3. There should be a reasonable scope covering the employment objects, time period, area or occupational activities of workers;
  4. There should be measures to compensate workers for their non-competition losses; and
  5. There should be facts of breach of trust or violation of the good-faith principle in the competitive acts of former workers.

However, in comparison with ordinary employment contract, practical opinions hold that the review of such non-competition clauses seems to tilt towards franchisors since a franchise agreement involves the provision of massive operating techniques. Non-competition periods ranging from one to three years are reasonable, and the determination of compensatory clauses is relatively looser, as discussed below.

  1. Validity of non-competition clauses in a franchise agreement:

Practical judicial opinions hold that "since the non-competition clauses are stipulated for franchisees to prevent them from becoming immediate competitors after they obtain know-how and trade secrets, licensors can certainly stipulate the obligation not to compete after the contract expiresdue to the existence of interest legally and economically worthy of protection such as operating know-how and trade secrets" (compare the 99-Shang-Yi-196 Civil Decision of the Tainan Branch of the Taiwan High Court).

  1. Periods and scope in which non-competition clauses in a franchise agreement are valid:

Practical opinions hold that "to protect the survival and work rights of franchisees, such prohibitive obligation is valid if it is limited to certain areas and to a definite period of time and should be specifically assessed and determined in individual cases," and that the restriction imposed under non-competition clauses "are deemed valid if they can be perceived to be reasonable and appropriate and do not jeopardize the economic survival of the parties subject to the restriction according to general social concepts and commercial practices" (compare the 99-Shang-Yi Civil Decision of the Tainan Branch of the Taiwan High Court and the 89-Chung-Shang-224 Civil Decision of the Taiwan High Court). To wit, the time period and geographic scope of non-competition clauses should be specifically examined in individual cases to determine if they are reasonable and do not undermine the economic survival of the franchisees according to general social concepts and commercial practices. If the geographic scope of non-competition clauses is limited to the "original franchise area," a one-year non-competition period should be reasonable (compare the 99-Shang-Yi-196 Civil Decision of the Tainan Branch of the Taiwan High Court). There are certain court opinions that hold that since a covenant not to compete "with the restriction on the types of work that shall not be engaged for three years should not undermine economic survival, and since the covenant is based on the consent of the appellant, it neither violates the spirit of protecting the work rights of the people under the Constitution nor contravenes other mandatory requirements, not to mention that it has no bearing on public order. Therefore, such covenant should be valid. In addition, since the non-competition clauses only prohibit the operation of the same type of restaurant and does not restrict any work or investment in the food and beverage sector, the restriction does not exceed a reasonable scope (compare the 89-Chung-Shang-224 Civil Decision of the Taiwan High Court). There are also other court opinions holding that with respect to the covenant not to compete that stipulates that no work shall be performed in the premises of relevant businesses and that the same type of business shall not be established by the franchisee alone or in partnership with another party within three years after the franchise is withdrawn, the period and provisions of such clauses are reasonable and valid (compare 99-Shang-1315 Civil Decision of the Taiwan High Court).

  1. Justification of compensatory measures:

As for whether there should be measures that compensate franchisees for non-competition losses like the non-competition clauses in labor contract, there is still no consensus in practice. Some courts hold that the preconditions for valid non-competition clauses for franchise relations should include: (1) the franchisor should have interest that needs to be protected under non-competition clauses; (2) the franchisees should learn about such justified interest out of their job duties; and (3) in addition to the requirement that the restriction on scope of the objects, time period, area or occupation pertaining to a franchisee's continued operation of similar businesses should not exceed a reasonable scope, it should be additionally stipulated that the franchisor shall pay a compensation to the franchisee for the non-compensation clauses(compare the 96-Su-712 Civil Decision of the Taipei District Court of Taiwan). In addition, a review of recent court decisions suggests that when the courts determined the validity of non-competition clauses in franchise agreements, most of them did not touch upon the compensatory measures and merely determined the reasonableness of such restriction. Therefore, there is still no conclusive opinion at present.

Based on the foregoing reasons, practical judicial opinions hold that non-competition clauses in franchise agreements should be valid, and that the time period and geographic scope of the non-competition restriction should be specifically considered and determined in individual cases to determine if such restriction is reasonable and if the economic survival of the franchisees will be jeopardized according to general social concepts and commercial practices. According to current practical opinions, non-competition clauses with one to three-year restriction, a geographic scope limited to "the originally franchise area" and the limitation that the same type of business shall not be engaged or operated should be valid.