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Franchising and Noncompetes: How the FTC’s Proposed Rule Leaves out Franchisees

We previously reported on the Federal Trade Commission’s (FTC) proposed rule that would effectively ban most noncompete agreements in the workplace. However, the FTC’s proposed rule has one major exception: Franchisees.

The proposed rule states that the term “worker” does not include a franchisee in the context of a franchisee-franchisor relationship. The FTC justified this exception citing the franchisor franchisee relationship is more analogous to the relationship between “two businesses.” Therefore, non-competes binding franchisees would still be valid.

However, the franchisee exception is far from settled. In the Supplementary Information accompanying the proposed rule, the FTC acknowledges that in some cases “[f]ranchisor/franchisee non-compete clauses could potentially . . . [have] negative effects on competitive conditions similar to non-compete clauses between employers and workers.” As such, the FTC solicited comments on whether the proposed rule should incorporate franchisor/franchisee non-competes in future rule iterations. The comment deadline has just passed. When the final rule is published, we’ll see if anyone was able to change the FTC’s mind on this point.

Brody and Associates regularly advises management on complying with the latest local, state and federal employment laws. If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.454.0560