The Federal Trade Commission (FTC) moved in May 2024 to largely prohibit non-compete clauses in employment contracts. This represents a significant development for employment and business law. While initially set to take effect in September of 2024, challenges to the ruling are underway. While this is ongoing, franchisors should understand the implications and review their operational practices in anticipation of future limitations on non-compete enforcement.
At Wofsey Rosen, our business lawyers stay informed about legal changes like these, ensuring that you and your company remain up-to-date on developments that may impact your policies. Working with us can help you in examining the legal implications of non-compete agreements for franchisors and get your questions answered.
Current Status of the FTC’s Non-Compete Rule in Regards to Franchisors
The FTC’s non-compete rule originally exempted franchisees, considering them distinct from a typical employer-employee relationship. However, before the ban took effect, a federal court in the Northern District of Texas asserted that it lacked the statutory authority to issue such a comprehensive regulation. The FTC promptly filed a notice of appeal with the Fifth Circuit Court, indicating its commitment to continue the legal battle, leaving the issue still unresolved.
For franchisors, non-compete agreements are a vital protection, as they safeguard proprietary interests, including trade secrets, confidential business methods, brand reputation, and the integrity of their established systems. Such provisions ensure fair competition among existing franchisees and prevent former franchisees from leveraging acquired knowledge and training to compete directly.
For franchisees, these agreements can act as a restriction, with many arguing that they impede the future growth in professional opportunities by not allowing them to use their lived experience and investment after they leave their franchise agreement. This potentially stifles market competition as well as their personal livelihood. During the FTC’s ongoing legal battle, it is critical for franchisors to understand how to balance protecting their businesses with addressing franchisees’ concerns.
Examining Reasonable Guidance for Franchise Non-Compete Agreements
While the legal fight over non-compete agreements continues, a key group for franchise regulators, the North American Securities Administrators Association (NASAA), stepped in with some important advice. In January of 2025, NASAA’s Franchise and Business Opportunities Project Group issued guidance on how we should handle post-franchise non-compete clauses, centering on a few key points:
Understanding the Franchise Relationship
NASAA emphasizes the unique properties of a franchise relationship, which is not just a simple buyer-seller or employer-employee relationship. A franchise agreement grants a franchisee the right to operate a business using a proven system for a specified period. Franchisors expand their brand by using their franchisees’ investments, not just their own money. This shared growth benefits both parties, but it would not be possible without this mutual contribution.
Different Goals, Different Expectations
Franchisors aim to grow their brand, attract more customers, and increase profitability. Franchisees, on the other hand, as business owners, want to be as independent as possible, obtain profitable returns on their investment, and build a successful business in the long term.
When the Relationship Ends
The different goals and expectations of both parties often become most obvious when the franchise agreement ends. This clash of interests can create challenges in moving on. Franchisors want to protect their business and intellectual property after the split, but franchisees often want to use their newfound experience and skills to forge new ventures.
How the NASAA Defines a Reasonable Non-Compete
NASAA stresses that any post-franchise non-compete agreement should be reasonable and protect the franchisor’s legitimate business interests. They suggest:
- Coverage – The rules should only apply to competing businesses that are directly related to the franchise. Coverage of the non-compete agreement should not be too broad
- Time Limit – The time limit of the non-compete agreement should only be as long as truly needed to protect the franchisor’s business. This varies by industry, but the agreement should avoid overly restrictive terms
- Location – Restrictions on location should be as small as possible, such as a specific area around the old franchise location or other branded stores
Smart Moves for Franchisors
Franchisors can protect their business by ensuring that franchisees are required to return all branded items, including trademarks, signs, and website names when the agreement ends. Legal teams in charge of franchise agreements should regularly review their rules to make sure they align with the latest legal standards and industry practices.
Long-term Implications of Non-Compete Agreement Rule for Franchisors
As the legal debate continues, franchisors and franchisees should not expect the current rules on franchise non-competes to be the final word. The FTC indicated that they only exempted franchise agreements from its recent ban due to the lack of sufficient evidence. However, this could encourage individual states to implement their own bans or restrictions on non-competes within franchise agreements.
Work with Experienced Franchise Lawyers at Wofsey Rosen to Protect Your Business
With changes possible to the FTC’s non-compete ruling, be sure to speak with an experienced franchise lawyer to see if your agreements require any updates. Working with a legal team proactively can help your business strike the right balance of protecting your intellectual property while still allowing former franchisees to pursue opportunities within fair limitations. Contact the business lawyers at Wofsey Rosen today to get your questions answered and ensure you prepare your franchise for the future.