How Does the New FTC Non-Compete Rule Affect Franchising?

Picture of Schuyler "Rocky" Reidel

Schuyler "Rocky" Reidel

Schuyler is the founder and managing attorney for Reidel Law Firm.

Illustration of a franchisee signing a non-compete agreement

How have non-compete agreements in franchising been reshaped by the FTC’s new rule? While protecting trade secrets and franchisor brands, these agreements have always been central to franchise relationships. The latest FTC regulation introduces significant changes. This article delivers a precise exploration of these changes and how they stand to realign non-competitive agreements, guiding franchisors and franchisees through the intricacies of compliance and enforcement in the new landscape.

Key Takeaways

  • The FTC’s new rule bans non-compete agreements for employees in franchising, but exempts franchisor-franchisee relationships, while still requiring franchisors to inform employees of the change and compliance.

  • Franchisors must carefully consider the implications of the new FTC rule on non-competes, ensuring that their agreements with franchisees are compliant and effectively protect their proprietary knowledge and business interests.

  • Despite the exemption for franchises, non-compete clauses must be meticulously drafted and tailored to each legal jurisdiction, with franchisors advised to seek expert legal counsel for enforceability and protection against potential legal challenges.

The Role of Non-Compete Agreements in Franchising

Contractual provisions known as non-compete agreements are fundamental within the franchise industry. These clauses restrict former franchisees from opening comparable ventures that would directly compete with their franchisor after the termination of a franchise agreement. The implementation of such agreements is crucial for protecting franchisors against the risk posed by ex-franchisees who might exploit trade secrets to initiate competing businesses.

These compete agreements act as preventive measures, intended to dissuade exiting members from capitalizing on expertise and practices acquired during their time in the franchise system to contend with the franchisor’s business. Non-compete clauses need careful calibration—they should shield a franchisor’s vested interests but also allow former franchisees fair opportunities to maintain their livelihood post-agreement without excessively restricting them.

By maintaining this balance, these agreements reinforce trust within the framework of a franchise relationship. They safeguard not only the integrity and competitive edge of a brand, but also uphold respect for an individual’s right to progress professionally following departure from affiliation with that particular business network.

FTC’s Final Rule on Non-Compete Agreements

On the 23rd of April, 2024, a significant announcement came from the Federal Trade Commission concerning non-compete agreements within franchise operations. The new rule prohibits franchises from including non-compete clauses in contracts for their employees with the sole exception being those at the ‘Senior Executive’ level. All existing non-competes must be declared unenforceable by franchisees to their employees by the time this regulation comes into effect.

While these changes are pivotal, it is important to note that they do not apply between franchisors and franchisee agreements themselves. As such, it falls upon franchisors to revise their own franchise agreements accordingly under this final rule’s stipulations. Franchisors are required to excise any prohibited non-compete terms from employment contracts and inform relevant parties about pre-existing compete agreement clauses now rendered null and void by said ruling.

Key Findings and Implications

The FTC has determined that non-compete agreements are tantamount to unfair competitive practices. It is anticipated that prohibiting these agreements will promote innovation and facilitate the establishment of approximately 8,500 new businesses every year. This shift presents its own set of challenges.

Concerns have arisen regarding existing non-competitive scenarios such as those between franchisors and franchisees. They may pose similar issues to those encountered with employer-employee dynamics, which might impact the business interests of employers. Although at present there’s a lack of sufficient evidence leading to an exemption from the non-competitive ban for franchise relationships, future legislative examination could change their status.

In light of these developments, it’s advisable for franchisors to re-evaluate and potentially amend past contracts ensuring they adhere to current standards while maintaining other essential protective covenants in place.

Exemptions for Franchise Relationships

The FTC’s rule, transformative as it may be, allows for the continuation of non-compete agreements within franchisor-franchisee relationships. This acknowledgement is founded on the understanding that these interactions are more akin to a business-to-business relationship. Consequently, despite the broad federal ban on non-compete clauses, those relevant to franchise agreements maintain their enforceability.

Given this exemption from the national non-compete ban, an in-depth examination of existing franchise agreements published in the federal register becomes imperative. It will become necessary to adjust any non-compete clauses incumbent upon employees within these documents to align with new regulatory standards.

While franchisors and franchisees find themselves outside the scope of this ruling regarding competition agreements, it remains critical for franchisors, especially to grasp all facets of this regulation fully. Ensuring compliance requires them to make appropriate revisions in their contractual non-compete provisions thereby protecting their vested interests within each individual franchise agreement.

Crafting and Implementing Effective Non-Compete Clauses

The recent final rule issued by the FTC, which prohibits non-competitive agreements, does not encompass the dynamic between franchisors and franchisees. Due to the complex nature of these business relationships within a franchise context, it is critical that any non-compete clauses established are carefully evaluated and constructed in consideration of this new ruling. This process calls for an even more thorough approach in formulating a non-compete clause that aligns with regulatory requirements while simultaneously safeguarding the commercial interests of the franchisor.

In order to achieve both adherence to regulations and protective measures for their enterprise, individuals must cultivate an intricate understanding of what constitutes an enforceable non-compete agreement specific to franchises. It’s imperative as well that they seek expert legal counsel capable of guiding them through the intricacies inherent in laws pertaining to franchises when setting up such agreements.

Key Elements of Enforceable Clauses

Non-compete agreements define specific prohibitions that define involvement with a competing business, barring franchisees from engaging in, managing, or supporting any competitor following the termination of their franchise agreement. These compete agreements are typically enforceable for a period ranging between six months to two years. Such duration is deemed acceptable provided it reasonably safeguards the legitimate interests of the business without imposing excessive constraints.

The essence of non-compete clauses lies in securing trade secrets and proprietary information. It’s vital that these clauses articulate clearly defined terms which effectively protect such sensitive materials.

For these non-compete arrangements to be legally binding, they must be captured in written form and signed by both parties involved—the franchisor and the franchisee. The inclusion of a signed written clause contributes not only to its legal validity, but also reinforces solid relations between franchisors and their respective franchisees.

Importance of Legal Counsel

Delving into the intricate world of franchise law and formulating non-compete agreements that hold up in court necessitates specialized legal knowledge. It is prudent for franchisors to engage with legal counsel to confirm adherence of their non-compete clauses to local laws.

Recognizing that the validity of non-compete agreements can differ greatly across different states or countries, it’s critical to tailor these contracts accordingly. Legal professionals are equipped to provide strategic guidance on this tailoring process, ensuring your non-compete clauses are robust against potential legal scrutiny.

It’s also crucial for businesses to be well-prepared when it comes time to enforce their competition agreements. Consider implementing these strategies.

  1. Keep a roster of attorneys ready within each relevant jurisdiction.

  2. Understand thoroughly the details specific to both company operations and contractual obligations.

  3. Build a strong groundwork upon which enforcement actions will stand firm in case disputes arise over competition restrictions.

Navigating Non-Compete Agreements Post-Franchise Agreement

Illustration of a franchisee signing a non-compete agreement

A franchise agreement frequently encompasses non-compete clauses that prevent franchisees from participating in businesses that compete with the franchisor following the termination of their contract. These stipulations are vital for safeguarding the business interests of the franchisor after the conclusion of such agreements.

Yet, when it comes to enforcement post-franchise period, these non-compete provisions may encounter heightened examination by legal courts due to prevalent resistance against such restrictive agreements. As a result, it is essential that non-compete clauses within these agreements are drafted with precision and there’s a thorough comprehension concerning limitations placed on operating competing enterprises.

Restrictions on Competing Businesses

Franchise agreements often include non-compete clauses that prevent franchisees from establishing a competing business that could directly vie with the franchisor’s enterprise. The scope of businesses considered as competitors in these non-compete provisions typically encompasses entities offering parallel products or services, participating within the same sector, or appealing to an identical clientele base.

Such clauses usually forbid franchisees from exploiting exclusive tactics or operational practices gained through their association with the franchisor for initiating a similar venture post-termination of the franchise relationship. These specified constraints on engaging in competitive commerce become effective once there is a cessation of engagement underpinned by the terms of the franchise agreement.

These stipulations frequently incorporate geographic limitations which banish former franchisees from operating similar commercial endeavors within a proscribed radius relative to established sites held by the franchisor. By integrating such geographical confines into non-compete caveats, it safeguards and reinforces market supremacy for franchises at locales where they are already conducting business transactions.

Handling Legal Challenges

When a franchisee violates non-compete agreements, franchisors have the right to seek legal recourse. This could involve obtaining an injunction to stop the offending competitive actions or securing financial damages for any resulting losses.

Franchisors must be well-versed in their entitlements and the different legal strategies they can employ. Crafting a robust non-compete agreement with expert legal counsel is critical for safeguarding a franchisor’s business interests.

With ongoing changes in competition agreements regulations, particularly due to new rules from the FTC, these legal challenges are becoming more complex. Nevertheless, having sound legal guidance and an effective non-compete agreement enables franchisors to defend their rights while preserving their industry’s competitive advantage.


Franchise agreements often include non-compete clauses to prevent franchisees from becoming competitors, essential for protecting the business interests of franchisors. Recently imposed FTC rule modifications now require a meticulous reevaluation and amendment of these compete agreements in order to adhere to new compliance standards. Although these changes do not directly affect the relationship between a franchisor and a franchisee, they nonetheless impose additional obligations on franchisors.

Nevertheless, with strategic legal advice and precise drafting that aligns with updated regulations, non-compete agreements remain an indispensable asset for safeguarding a franchisor’s business imperatives. Franchisors can still utilize these competitive agreements effectively within their business operations to uphold the integrity of their franchise model amidst evolving regulatory landscapes.

Frequently Asked Questions

What is a non-compete agreement?

An employee enters into a non-compete contract with an employer, promising not to engage in or establish a business similar to the employer’s enterprise following the termination of their employment, thereby avoiding any competition.

Who does the FTC’s Final Non-Compete Rule apply to?

If you are engaged in a franchise business, it’s crucial to take note that the FTC’s Final Non-Compete Rule impacts non-compete agreements enacted by workers of both the franchisor and the franchisee.

This rule concerning non-compete clauses must be understood by anyone participating as either a franchisor or franchisee.

Does the FTC’s Final Non-Compete Rule prohibit non-compete agreements between franchisors and franchisees?

No, the FTC’s definitive Non-Compete Rule does not outlaw agreements restricting competition between franchisees and their franchisors.

What should franchisors do regarding non-compete clauses in their own employment contracts?

Except for Senior Executives or when related to the sale of a business, franchisors should remove non-compete clauses from their employment contracts and communicate to all employees who are presently bound by these clauses that they are not enforceable.

What happens if a franchisee breaches their non-compete agreement?

In the event that a franchisee violates their non-compete agreement, the franchisor is entitled to take legal measures. This could involve requesting an injunction to halt the ongoing competitive activities or demanding financial restitution for any damages incurred.

Such violations open up the possibility for pursuing legal remedies in order to deal with the breach of contract.