Non-Compete Restrictions

What Is a Non-Compete Restriction?

A non-compete restriction limits a person's ability to own, operate, manage, invest in, consult with, or otherwise participate in a competing business for a specified period of time and within a defined geographic area. Franchise agreements almost always include some form of non-compete because franchisors invest substantial resources developing proprietary systems, confidential operating methods, customer relationships, trademarks, and brand recognition.

Unlike employment agreements, franchise non-competes often involve the sale or licensing of significant intellectual property and business systems, which may provide stronger justification for reasonable post-termination restrictions under applicable state law.

Why Franchisors Use Restrictive Covenants

Restrictive covenants are intended to protect legitimate business interests, including:

• Confidential operations manuals
• Trade secrets and proprietary business methods
• Brand reputation and goodwill
• Customer relationships
• Franchise system integrity
• Training investments
• Territorial stability
• Existing franchisees from unfair competition

Without reasonable restrictive covenants, a franchisee could potentially learn the franchisor's system, terminate the relationship, and immediately compete using the knowledge and goodwill developed through the franchise system.

Types of Restrictive Covenants

1. Non-Compete Covenant

The traditional non-compete prohibits operating or participating in a competing business during the franchise term and frequently for a period following termination or expiration. These provisions often define:

• Duration (for example, one or two years)
• Geographic scope
• Activities prohibited
• Businesses considered competitive
• Individuals covered

2. Customer Non-Solicitation

Customer non-solicitation provisions prohibit former franchisees from contacting, marketing to, or attempting to divert customers developed during the franchise relationship.

Rather than preventing competition entirely, these provisions focus on protecting customer relationships and preventing unfair use of confidential customer information.

Typical restrictions include:

• Direct solicitation of existing customers
• Using customer databases
• Email marketing to former franchise customers
• Targeted advertising using customer lists
• Accepting transferred customer contracts under certain circumstances

3. Employee Non-Solicitation

Employee non-solicitation clauses prevent former franchisees from recruiting or hiring employees, managers, trainers, or other personnel associated with the franchise system.

These provisions attempt to reduce disruption to the franchise network and protect investments made in recruiting and training personnel.

Employee restrictions often prohibit:

• Recruiting employees
• Inducing employees to resign
• Hiring protected personnel
• Interfering with employment relationships

4. Confidentiality Agreements

Confidentiality obligations usually survive termination indefinitely. Franchisees are typically prohibited from disclosing or using:

• Operations manuals
• Training materials
• Recipes or formulas
• Software
• Pricing methods
• Marketing strategies
• Vendor information
• Trade secrets

5. Non-Disparagement Provisions

Some franchise agreements also contain non-disparagement provisions intended to prevent former franchisees from making false or damaging statements regarding the franchisor or franchise system.

Are Franchise Non-Competes Enforceable?

Enforceability depends on applicable federal and state law. Courts commonly evaluate:

• Whether the restriction protects a legitimate business interest.
• Whether the geographic area is reasonable.
• Whether the duration is reasonable.
• Whether the restriction is broader than necessary.
• Whether enforcement would violate public policy.

Some states have adopted statutes that substantially restrict or prohibit certain non-compete agreements, while others continue to enforce reasonable restrictive covenants. Because these laws continue to evolve, franchise agreements should be drafted and reviewed with current state law in mind.

Drafting Considerations

Well-drafted restrictive covenants typically address:

• Clear definitions of competitive activities
• Reasonable geographic limitations
• Reasonable time limitations
• Protected confidential information
• Customer definitions
• Employee definitions
• Available injunctive relief
• Blue-pencil or judicial modification provisions where permitted

Common Questions

Does every franchise agreement contain a non-compete?

Most franchise agreements contain restrictive covenants, although their scope and enforceability vary considerably.

Can a franchisee own another business?

Sometimes. It depends upon the language of the franchise agreement and whether the business falls within the definition of a competing business.

Can a franchisor prevent solicitation of customers?

Many franchise agreements include customer non-solicitation provisions, although enforceability depends upon applicable law.

Can a franchisor stop a former franchisee from hiring employees?

Many agreements include employee non-solicitation provisions restricting recruitment of protected employees for a specified period.