FTC seeks public comments on proposal to expand ban on noncompetes to franchisor-franchisee relationships

On January 5, 2023, the Federal Trade Commission (FTC), through its release of a notice of proposed rulemaking, announced a sweeping new proposed rule banning non-compete agreements (Non-Compete Clause Rule) between nearly all employers and their workers.

In a recent op-ed published by The New York Times, Lina M. Khan, chair of the FTC, explained some of the reasons behind the Non-Compete Clause Rule. Khan argued that non-competes are a restriction on competition that Section 5 of the FTC Act is intended to prevent. She relied on studies purporting to show that non-compete clauses systemically drive down wages, even for workers without one, and reduce entrepreneurship and startup formation. She did not mention franchise relationships, however – and, as currently drafted, the Non-Compete Clause Rule would not cover non-compete clauses between franchisors and franchisees.

In its notice, though, the FTC expressly leaves open the possibility of amending the Non-Compete Clause Rule, following public comment, to cover post-termination franchisor/franchisee non-compete clauses. The FTC states that these clauses “may present concerns under Section 5 similar to the concerns presented by non-compete clauses between employers and workers.” The FTC explains that, by “restricting a franchisee’s ability to start a new business, franchisor/franchisee non-compete clauses could potentially stifle new business formation and innovation, reduce the earnings of franchisees,” and “could also potentially be exploitative and coercive in some cases.” The FTC makes no mention of any counterbalancing interests that justify such clauses.

Based on its concerns, and to determine whether to amend the Non-Compete Clause Rule to address franchisor/franchisee non-compete clauses, the FTC seeks public comment on:

• Whether the proposed rule should cover franchisor/franchisee non-compete clauses and why
• Whether franchisor/franchisee non-compete clauses should be categorically banned or subject to a rebuttable presumption of unlawfulness
• Whether the rule should apply uniformly to all such non-compete clauses or whether certain categories of franchisor/franchisee non-compete clauses should be exempt or subject to different standards and
• Data or other evidence that could inform the FTC’s consideration of franchisor/franchisee non-compete clauses.

If the FTC decides to expand the Non-Compete Clause Rule to cover franchisor/franchisee relationships based on public comments it receives in response to these questions, and if the Non-Compete Clause Rule goes into effect, it would likely make it unlawful for franchisors to enter into, attempt to enter into or enforce post-termination non-compete clauses with their franchisees. The Non-Compete Clause Rule would also potentially preempt all inconsistent state laws, precluding individual states from adopting or enforcing a more lenient approach to franchisor/franchisee non-compete clauses.

If you wish to comment on the proposed new rule, comments must be received on or before March 10, 2023 and may be filed online here.