FTC excludes a franchisee in the context of a franchisee-franchisor relationship from its final rule banning non-competes

The Federal Trade Commission (FTC) approved a final rule imposing a national prohibition against non-competes along partisan lines (3-2) during an open meeting on April 23, 2024 (the Final Rule).  The Final Rule becomes effective 120 days after publication in the Federal Register, absent any further legal and/or other action. 

The Final Rule defines “worker” as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”  The definition further states that the term “worker” includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship. 16 CFR Part 910.1.

The FTC, in its comments to the Final Rule, explained that the relationship between a franchisor and franchisee may be more analogous to the relationship between two businesses than the relationship between an employer and a worker, and that the evidentiary record before the FTC related primarily to non-competes arising solely out of employment.  The FTC stated that it believed it would be appropriate to clarify that a franchisee—in the context of a franchisor-franchisee relationship—is not a “worker” for purposes of proposed § 910.1(f).

Prohibiting non-competes for franchisees would threaten to severely disrupt or destroy the franchise business model.  Non-competes are critical to the franchise business model because they offer both franchisors and franchisees confidence that existing franchisees will likely stay with a brand and refrain from using a franchise’s trade secrets to unfairly compete against the franchisor.

Non-competes used in the context of franchisor/franchisee relationships remain subject to State common law and Federal and State antitrust laws, including section 5 of the Federal Trade Commission Act (FTC Act) (15 USC 45), which prohibits “unfair or deceptive acts or practices in or affecting commerce.” 

The FTC’s Final Rule has been legally challenged by the U.S. Chamber of Commerce.  On April 24, 2024, the Chamber filed a lawsuit in a Texas federal court alleging that the FTC has exceeded its constitutional authority in promulgating what is national “legislation” banning non-competes.  Several more legal challenges are expected.

A link to McDonald Hopkins’ summary of the FTC’s Final Rule imposing a national prohibition on all existing non-competition agreements, subject to minor exceptions, is listed below:

An employer’s practical guide to the FTC’s Non-Compete Rule (mcdonaldhopkins.com)