Reassessing Non-Compete Clauses: NASAA's Impact on Franchise Agreements

The North American Securities Administrators Association (NASAA) has recently issued significant guidance regarding post-term non-compete clauses in franchise agreements. This guidance represents a critical step for franchisors adapting to a shifting legal landscape, particularly following the Federal Trade Commission's (FTC) scrutiny of non-compete agreements in 2024.

Understanding NASAA's Recent Guidance

The NASAA's Franchise and Business Opportunities Project Group (FPG) has articulated that while non-compete provisions can have utility within the franchise model, they must be designed to be reasonable and limited in scope. This guidance addresses ongoing concerns regarding the regulation of such clauses and comes after extensive public commentary—5,200 responses—highlighting non-competes as a primary issue for franchisees.

The Evolution of Non-Compete Policies

In 2023, the FTC put a spotlight on non-compete clauses, issuing a request for information and ultimately banning these contracts in employment settings. Following legal challenges questioning the FTC's authority, the NASAA's guidance serves to clarify the state-level stance on non-competes in franchising, focusing on balancing the interests of existing franchisees and the franchiser.

Key Factors for Reasonable Non-Competes

According to NASAA, four key elements should be evaluated when drafting post-term non-compete clauses:

• Scope: Franchisors must narrowly define prohibited activities to protect their interests without unnecessarily hamstringing the franchisee’s ability to engage in new ventures.

• Duration: The length of non-compete clauses must reflect industry realities; mature industries may require shorter durations than more innovative sectors, and factors like market penetration should be considered.

• Geography: Geographic restrictions should align with where the franchisee operated and customer bases originate, particularly relevant for both brick-and-mortar and internet-based franchises.

• Effect on Departing Franchisees: The impact these clauses have on exiting franchisees should be kept in mind to ensure they have a fair opportunity for professional mobility.

Anticipating Increased Scrutiny

Franchise practitioners predict a rise in scrutiny from state regulators concerning the reasonableness of non-compete clauses during the franchise registration process. As evaluators like NASAA begin taking an interest in these provisions, franchisors are urged to undertake thorough reviews of their contracts to align with the newly articulated standards. Failing to address these potential issues could lead to delayed franchise registrations, complicating business operations.

Legal Considerations for Franchisors

Franchise attorneys recommend regularly assessing the enforceability of non-compete clauses and ensuring that they comply with evolving legal expectations. Existing guidance emphasizes the importance of clear and justifiable non-compete provisions that protect the franchisor’s interests while allowing franchisees to leverage their experience in future ventures.

Looking Ahead: The Future of Franchise Agreements

The implications of NASAA's guidance may resonate beyond immediate compliance. As franchisors navigate the tension between protecting their brand and fostering a sustainable franchisee network, they must evolve their practices to embrace transparency and fairness. The careful consideration of non-compete agreements could potentially enhance operational efficiency, ensuring brand consistency and improved franchisee performance.

In conclusion, as the franchise landscape adapts to tightened regulations and emerging insights, franchisors must remain proactive in evaluating their non-compete policies. This not only encourages compliance but also fosters better relationships within the franchise network, ultimately leading to collective business success.

If you're a franchisor, now is the time to review your agreements and make necessary adjustments to align with NASAA's standards and prepare for heightened scrutiny from regulatory bodies. Embracing best practices in compliance can lead to a more robust and cohesive franchising operation.