Non-compete agreements are banned at the national level with a new rule from the Federal Trade Commission, except for those between franchisors and franchisees.
Under the new FTC rule, announced April 23, existing non-competes for most workers are no longer enforceable. The exception is for senior executives. Existing agreements can stay in effect, though employers are banned from entering new non-competes with them. The rule defines senior executives as those earning more than $151,164 who’re in policy-making roles.
According to the FTC, the rule is meant to prevent an “unfair method of competition for employers.” The regulation, set to take effect 120 days after publication, doesn’t apply to agreements between franchisees and franchisors.
In a press release, the FTC stated it found the relationship between a franchisee and franchisor more similar to the type between two businesses than between an employer and employee. Non-competes are banned, though, for employees of franchisees and franchisors alike.
Michael Layman, senior vice president of government relations and public affairs for the International Franchise Association
Responding for the International Franchise Association, Senior Vice President of Government Relations and Public Affairs Michael Layman praised the FTC for its exclusion of the franchise relationship but still expressed concern.
“Banning non-competes in employment agreements will undoubtedly harm small businesses everywhere,” Layman said. “However, the IFA is glad the commission listened to the concerns of the franchise community and recognized the importance of protecting the franchisor-franchisee relationship in the final rule.
“The preservation of non-competes in contracts between franchisees and franchisors is especially critical to prevent former franchisees from unfairly using proprietary information to compete with current franchise small business owners, which would be detrimental to the franchise business model, the brand companies have built and the local businesses franchisees run,” said Layman.
Mike Gray, a partner with the law firm Lathrop GPM, said if there is an impact on franchising, it will be felt more by the franchisors than franchisees.
“I don’t know if there’s going to be as many franchisees dealing with the senior management section, unless they’re a large multi-unit owner,” Gray said. “There’s likely not going to be a lot of employees that have a noncompete with a salary over $151,000.
Lathrop GPM Partner Mike Gray
“I think on the franchisor side, the thing they need to do is start looking at their employment agreements and decide whether they need to bolster their protections related to confidential information or trade secrets using something other than a non-compete,” said Gray. “That’s going to depend on the nature of the franchise business and what they want to protect.”
Elliot Ginsburg, a franchising attorney with the firm Garner, Ginsburg & Johnsen, also mentioned non-compete alternatives, and said it’s something franchisees should consider, too.
“We’ll see how it develops, but it seems like things are staying as they are with the franchise relationship,” Ginsburg said. “There are, however, franchise agreements out there that require franchisees to have their employees sign non-competes, and that is going to have to go away.
“It could make things tough for certain types of franchisees,” said Ginsburg. “If a franchisee of a fitness concept has just trained a manager on their exercises, that manager could theoretically start their own business then with that knowledge. It could be difficult if they train managers on something unique, but still, there are confidentiality provisions possible.”
Both Ginsburg and Gray cited options such as confidentiality provisions, non-solicitation agreements, copyright laws and intellectual property rights as protections when the rule takes effect. For example, Gray said brands can add copyrights to protect print materials, such as operations manuals.
Gray is telling his clients not to do anything drastic yet, though, as he’s not convinced the rule will last long.
“I have significant doubts that it will take effect, because the FTC overstepped their authority on this one,” Gray said. “This is an act that essentially took millions of private contracts and threw out the non-compete part. From my perspective, if that’s going to be done, it has to be at the congressional level. The FTC commissioners are unelected and not really accountable to anyone, and they have gone ahead and made a new law.”
Elliot Ginsburg of Garner, Ginsburg & Johnsen
Gray said in the near future the rule would likely be challenged and halted in court the same way the National Labor Relation Board’s joint employer standard has. The new FTC rule has already been challenged legally, with the U.S. Chamber of Commerce filing a lawsuit.
Should the rule stay in effect, though, Ginsburg said it will be a positive development for workers.
“For too long, non-competes have let employers off the hook,” Ginsburg said. “Now, they have to compete for talent, which I think is a great thing for employees. It is certainly going to change the way things happen in business. Plus, there are still the things that employers have that they can use to protect themselves from an employee breaking away and stealing trade secrets.”