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How does the proposal to ban noncompetes affect franchising?

On Behalf of | Apr 3, 2023 | Franchise Law |

Earlier this year, the Federal Trade Commission (FTC) proposed a rule to ban noncompetes in employment agreements, which includes franchise contracts. This is due to the increasing concern that employers unreasonably use this clause to limit employees from expanding their career opportunities and restrict franchisees from starting new businesses, respectively.

With this proposed rule, the FTC aims to promote fair and reasonable competition to boost the quality of the industry’s workforce, products and services. But how exactly does this affect franchising?

The rule’s possible effect on franchising

Removing the noncompete clause in a franchise agreement means that a franchisee can establish a business in a similar way to their franchisor within a certain geography and time period, while continuously operating the franchise.

Looking at it from the FTC’s perspective, if the rule is approved, the franchisee can now form a new similar business without limit to their innovation and possibly increase their earnings. However, franchisors might find this proposed rule harmful to their business, with concerns over increased competition and decreased protection of trade secrets or practices. Since the franchisee underwent training under the franchisor’s expertise and experience in the field, the latter might feel that there is a possibility that the franchisee will apply this to their new business.

Mere possibilities

While the proposal to ban noncompetes garners split opinions, the effects are merely possibilities. Currently, the proposed rule is still open to public comment. The FTC specifically seeks comments related to how the rule will affect franchise agreements. For more information, contact Zarco Einhorn Salkowski, P.A. for a free consultation.