Franchise Regulation: New FTC Rule Bans Non-Competes but Excludes Franchises

handling franchisee litigation

By Andrew Seid, Senior Consultant, MSA Worldwide

Franchise Regulation Update

April 2024 — The Federal Trade Commission recently announced a new rule that will ban employers from imposing non-compete clauses on their workers. The ban applies to employment contracts and de facto non-compete policies. It’s a sweeping move aimed at promoting fair competition and higher wages by giving workers more freedom to change jobs.

However, there is a notable exception – the new rule will not prohibit non-compete provisions between franchisors and franchisees. Franchisors will still be allowed to restrict franchisees from operating similar businesses during and after the franchise relationship.

This carve-out recognizes the unique nature of the franchisor-franchisee relationship. A franchisor licenses its brand, operating systems, and intellectual property to franchisees. In return, franchisees pay fees and royalties and agree to comply with brand standards.

Protecting the Franchisor-Franchisee Relationship

Franchisors often provide trade and brand secrets as well as other sensitive information to franchisees to help assist them in meeting brand standards. The FTC highlights that the franchisor-franchisee relationship “may in some cases be more analogous to the relationship between two businesses than the relationship between an employer and a worker.” In that type of relationship, the FTC found that certain levels of restraint and protection are still justified. The FTC did, however, clarify that “non-competes between franchisors and franchisees remain subject to [F]ederal antitrust law as well as all other applicable law.”

Non-compete provisions in the franchise relationship also help protect the existing franchisees of that brand. Franchisees, whether current or those exiting the system, are prevented from using a franchisor’s protected intellectual property and other sensitive information in a way that would damage the equity that current franchisees have developed in their own businesses.

So while the new FTC rule opens up labor markets for millions of workers, it preserves existing standards for franchise non-competes. Franchisors can still restrict franchisees from operating copycat businesses within certain geographic areas for a period of time after leaving the franchise system. This recognizes the franchisors’ legitimate interests in brand protection and competition avoidance.

Overall, the FTC rule takes an important step to promote worker mobility while still accommodating standard franchise practices that have been accepted for decades. It aims to strike a balanced approach between openness and business interests.

Related: MSA Worldwide Response to the FTC’S Request for Information on Franchise Agreements & Franchise Business Practices

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