Introduction

On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning non-compete agreements for most employees nationwide.

The FTC’s landmark decision, set to take effect on September 4, 2024, marks a dramatic shift in how businesses will manage their workforce. Legal challenges have already been filed, raising the possibility that the rule might never go into effect. Nonetheless, franchisees and other employers should prepare for compliance. Many franchisees are particularly concerned about how this will affect their relationships with their franchisors and their own employees. Assuming the law goes into effect, understanding the nuances of this rule will be crucial for franchise owners. Let's break down what this means for your franchise business.

What the Rule Means for Franchisees’ Non-Competes

Most franchise owners must agree to non-compete clauses in their franchise agreements. These clauses generally restrict franchisees from operating competitive businesses during the franchise term and for two to three years after its termination or expiration. Unfortunately for franchisees, the FTC explicitly excluded franchise non-competes from the rule's scope because it focused on non-competes within the employment context. The FTC views the relationship between a franchisor and a franchisee as more of a business-to-business interaction rather than a typical employer-employee relationship. As a result, the nationwide ban does not affect non-compete clauses between franchisors and franchisees. They will continue to be governed by state common law and applicable federal and state antitrust laws. This distinction is critical for franchise owners to understand as they navigate their rights and obligations under the new regulatory landscape.

It’s important to note that your franchise agreement's non-compete clause may still be unenforceable under state law (such as in California, where virtually all non-competes are unenforceable) or if the clause is drafted too broadly. Courts have increasingly been reluctant to enforce franchise non-competes that too broadly restrict franchisees from operating post-termination. This trend might accelerate with the new FTC rule, potentially leading courts to dismiss franchise owners’ non-compete clauses more frequently.

Impact on Franchisees' Agreements with Their Employees

While franchisees can still be subject to non-compete agreements with their franchisors, the new rule significantly alters the landscape for non-competes between franchisees and their employees. As of September 4, 2024 (assuming the rule withstands legal challenges), franchisees will no longer be able to require their managers or other employees to sign non-compete agreements or enforce those they have already entered. Franchisors will also be prohibited from requiring their franchisees to impose non-compete agreements on the franchisee’s employees.

Compliance and Communication

Unless the legal landscape changes to prevent this rule from going into effect, franchisees will need to comply by informing their employees that any existing non-compete agreements will not be enforced in the future. The FTC has provided model language to help employers communicate this change effectively.

Protecting Your Business Interests

With the inability to enforce non-compete agreements with your employees, safeguarding your business’s confidential information becomes even more crucial. Franchisees should consider strengthening their confidentiality agreements to protect their proprietary information. Consulting with a franchise or employment lawyer to ensure these agreements are robust and enforceable under state law is advisable.

Conclusion

The FTC’s new non-compete ban introduces significant changes for franchisees, particularly regarding their relationships with their employees. Navigating this new landscape requires staying informed and consulting with legal experts to adapt to these changes effectively while protecting your business interests. While non-compete agreements with your employees may no longer be viable, there are still effective ways to protect your business’s vital assets and maintain its competitive advantage.

Need More Information?

Consider speaking with a specialized franchise attorney to understand the full impact of the FTC's new rule on your specific situation and to ensure your business remains compliant and competitive in this new regulatory environment. Read more about the FTC announcement here.