How Franchisors Legally Manage Franchisee Competition

A franchisor’s main legal tool for managing competition between franchisees is territorial allocation — assigning each franchisee a defined area and disclosing it in Item 12 of the FDD — backed by the franchise agreement’s good-faith obligations. That much is well-established and lawful. The danger zone is the temptation to reach further: blanket clauses that restrict where franchisees can hire or whether they can compete after leaving have drawn serious antitrust and state-law scrutiny, and some of the old playbook is no longer safe. This guide separates the franchisor’s settled tools from the ones that now carry real legal risk.

The Settled Tool: Territory Allocation

The cleanest way to prevent franchisees from cannibalizing each other is to give each one a defined territory and stick to it. Assigning exclusive or protected areas among a brand’s own franchisees is a vertical restraint, and since Continental T.V. v. GTE Sylvania (U.S. Supreme Court, 1977) such territorial restrictions are judged under the antitrust “rule of reason” rather than treated as automatically illegal. In practice, dividing a system into territories to reduce overlap is lawful, because antitrust law is concerned chiefly with competition between brands, not within one.

The mechanics run through the FDD. Item 12 discloses each franchisee’s territory, whether it is exclusive, protected, or non-exclusive, and what the franchisor reserves for itself — including alternative sales channels like e-commerce and national accounts. Defining those boundaries clearly, and reserving rights explicitly, is what lets a franchisor expand the system without breaching the promises it made to existing franchisees. The detail lives in the franchise territory rights guide.

The Limit on Territory: Good Faith

Clear territory lines reduce disputes but don’t eliminate them. Most states read an implied covenant of good faith and fair dealing into the franchise agreement. That covenant can’t override express terms — a franchisor that reserved the right to open nearby generally hasn’t breached by doing so — but it constrains conduct that destroys the value of what was granted in bad faith. The practical lesson for franchisors: encroachment claims are won or lost on what Item 12 and the agreement actually reserved, so the reservations have to be both fair and explicit before growth creates friction.

Non-Competes: Now a State-Law Question

In-term covenants that keep a franchisee from running a competing business, and post-term covenants that limit competition after the relationship ends, are common — but their enforceability is governed by state law, and that landscape shifted.

The FTC’s 2024 rule that would have banned most non-competes nationwide never took effect. A federal court set it aside in Ryan LLC v. FTC (N.D. Tex., August 2024); the FTC dropped its appeals in 2025 and formally removed the rule from the Code of Federal Regulations in early 2026, moving to case-by-case enforcement instead. As of 2026, there is no federal ban — but that simply returns the question to the states, and the states diverge sharply. A handful (California most notably) void most non-competes outright, while others enforce them only if they are reasonable in scope, geography, and duration. A clause that holds up in one state may be unenforceable in another, so franchisors operating across state lines cannot rely on a single nationwide covenant.

The Antitrust Danger Zone: No-Hire / No-Poach Clauses

A different and riskier device is the “no-poach” or no-hire clause — a provision barring franchisees (and often the franchisor) from hiring one another’s employees. These restrict competition for workers rather than for customers, and they have become a focus of antitrust enforcement and litigation.

The signal case is Deslandes v. McDonald’s. In 2023 the Seventh Circuit revived a challenge to McDonald’s franchise no-hire clause, declining to treat it as automatically lawful and signaling that such clauses must survive real antitrust scrutiny rather than an easy ancillary-restraint pass. Whether they are analyzed as per se violations or under the rule of reason remains unsettled, and many franchise systems removed these clauses under pressure from federal enforcers and state attorneys general. The takeaway for franchisors is concrete: a system-wide no-hire clause among franchisees is no longer a safe default and should not be adopted or kept without current antitrust advice.

What a Defensible Approach Looks Like

Beyond the clauses, the durable approach is structural: standards-based operations so units compete on execution rather than poaching each other, clear performance expectations, and a defined dispute-resolution path (often mediation or arbitration) for the conflicts that still arise.

Frequently Asked Questions

Can a franchisor legally divide territories among franchisees?

Yes. Allocating exclusive or protected territories among a brand’s own franchisees is a vertical restraint judged under the antitrust rule of reason and is generally lawful, because it limits competition only within one brand. It is the primary legal tool for managing overlap between franchisees.

Are no-poach clauses between franchisees illegal?

They’re under serious legal scrutiny. The Seventh Circuit’s 2023 Deslandes v. McDonald’s decision revived a challenge to a franchise no-hire clause, and the governing antitrust standard is unsettled. Many systems have dropped these clauses. A franchisor should not adopt or keep one without current antitrust counsel.

Can a franchisor still enforce a non-compete against a franchisee?

It depends on the state. The FTC’s nationwide non-compete ban was vacated and removed from federal regulations by 2026, so enforceability is governed by state law — which ranges from outright bans (California) to enforcement of reasonable covenants. Cross-state systems can’t rely on one uniform clause.

What stops franchisees from competing unfairly with each other?

Primarily the territory and reserved-rights terms in the franchise agreement and FDD Item 12, supported by the implied covenant of good faith and fair dealing in most states. Clear boundaries, consistent enforcement, and a defined dispute process do more than restrictive covenants.

Managing competition inside a franchise system is mostly about getting the territory and good-faith terms right — and knowing which restraints now cross an antitrust or state-law line. Reidel Law Firm advises franchisors on system structure, FDD territory provisions, and disputes between franchisees — talk to a franchise attorney before you roll out a system-wide restriction.