Many of our international clients looking to bring a foreign brand they own into the Taiwan market do so using a franchise model. We have seen foreign franchises operate across a broad array of business sectors, with food and beverage, fashion, and retail being among the most competitive.  When establishing franchise relationships in Taiwan, protection of intellectual property and brand reputation is a primary concern for these foreign brand owners.

Non-competition provisions in franchise agreements are an essential element in achieving the brand protection objectives of our franchise clients.  In such provisions the franchisee promises not to own, operate, lease, or have any interest in owning, operating, or managing any business which competes with the business of the franchisor or ultimate brand owner within a specified territory.  These covenants typically survive termination of the franchise agreement for one (1) to two (2) years.

Such provisions have recently garnered attention in the United States after the United States Federal Trade Commission (the “FTC”) announced a proposed rule which, with limited exceptions, would ban non-compete covenants in employment agreements.[1]  At the time, the FTC indicated that it was also contemplating broadening the scope of this proposed rule to cover franchise agreements. Although that did not happen, the FTC’s suggestion ignited a debate as to whether, and to what extent, non-compete covenants are enforceable by a franchisor or brand owner against a franchisee.  The FTC’s proposed rule is expected to be finalized for promulgation in April 2024 at the earliest.[2]

As of the date of this article, non-compete provisions in franchise agreements remain generally enforceable in Taiwan.  However, there are a few noteworthy considerations that may thwart or substantially alter such enforcement.  Set out below are tips to increase the likelihood of enforcement of these provisions.

1. Tie restrictions to protection of proprietary interests

Carefully consider what propriety interests are being protected by the non-compete provision.  Without any proprietary interest to protect (think KFC’s fried chicken recipe), franchisors could find themselves being prohibited from enforcing the non-compete provision they have so carefully crafted and negotiated for in their franchise agreement.[3]

2. Draft clear and reasonable temporal and geographic restrictions

Always aim to avoid ambiguity in the description of permitted and prohibited competitive behaviors. In particular, state any temporal and geographic restrictions with specificity (e.g., “within a five-kilometer radius of the intersection of ABC Road and XYZ Street in Taipei City” NOT “the northern part of the Metro Taipei City Area”).[4] If the provision is ambiguous, a Taiwan court may interject its own judgment as to the appropriate restrictions.

Additionally, we recommend researching court decisions related to the enforcement of similar non-compete provisions in the applicable industry sector.  Keep any temporal and geographic restrictions within limits which Taiwan courts have previously deemed reasonable.  To do otherwise risks the court considering the non-compete provision to be an unreasonable restraint of trade and thus, unenforceable.

3. Consider differences between preliminary injunctions and trial proceedings

Consider whether expedited enforcement of the non-compete provision is vital to protection of your interests.  Taiwan courts employ different standards when determining whether to enforce such provisions upon a request for preliminary injunctions versus as a final court judgment.  In the case of a request for enforcement by preliminary injunction, a court would be much less likely to enforce the non-compete provision.  The court would weigh the likelihood of infringement of the franchisor’s or brand owner’s proprietary interests against the detrimental economic impact (e.g., loss of employment opportunities) of enforcing the non-compete provision.  Our experience is that in the context of preliminary injunctions, such provisions are enforced no more than thirty-three percent (33%) of the time.

We hope these tips prove useful to anyone drafting or reviewing franchise agreements to be used in Taiwan.  Please reach out to Greg Buxton at gbuxton@winklerpartners.com if you have any questions regarding franchising in Taiwan.

[1] See https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking.

[2] See https://news.bloomberglaw.com/antitrust/ftc-expected-to-vote-in-2024-on-rule-to-ban-noncompete-clauses.

[3] See Taiwan High Court Tainan Branch Court Judgment No. 101-Shang-Yi-289.

[4] See Taiwan High Court Judgment No. 110-Shang-Yi-496.