FTC Updates and Impact on NY Franchising

The Federal Trade Commission (FTC) has been focusing recently on the relationship between franchisors and franchisees. This has created a unique opportunity for franchise stakeholders to use their voices to influence policy.

In addition to seeking comments about the franchise relationship, proposed rules involving non-compete agreements were also open to public comment and remain a hot topic in 2023. Let’s examine how the FTC’s open calls impact NY franchising.

Deadline Extended For Reporting Unfair Practices

Shortly after our roundup of franchise developments in Q1 2023, the FTC extended its public call for feedback on the state of franchising. The new date to submit comments is June 8, 2023.

The FTC wants to know more about how franchisors exert control over franchisees and their workers. “In particular, the agency is interested in how franchisors disclose certain aspects and contractual terms of the franchise relationship, as well as the scope, application, and effect of those aspects and contractual terms,” the agency stated.

“The FTC hopes to hear from a broad range of stakeholders about how the franchise relationship is working, and how it is not,” Samuel Levine, Director of the FTC’s Bureau of Consumer Protection said in March. “This cross-agency effort [with the FTC’s Office of Policy Planning] will inform our policy and enforcement efforts as we work to ensure a fair marketplace for franchisees.”

Comments can be submitted through June 8, 2023 at Regulations.gov, and will be posted to the site for public review. More than 165 comments are already available to view and users may post anonymously. Some of these comments are quite candid and may mirror your own feelings, inspire you to contribute or provide actionable takeaways.

The FTC’s Proposed Non-Compete Rules

Also as previously discussed, the FTC accepted public comment through mid-April on a proposed rule to ban noncompete clauses for workers in some situations at the federal level. This stemmed from President Biden’s 2021 Executive Order On Promoting Competition in the American Economy, which “encourages the FTC to ban or limit non-compete agreements.” Further, the Biden administration tasked the FTC to investigate and draft new rules.

While the order largely addresses non-competes with regard to labor and employment matters, the FTC sought input on the question of whether the proposed rule should also apply to non-compete clauses between franchisors and franchisees. The FTC noted earlier this year:

“…[S]hould the rule cover non-competes between franchisors and franchisees? The current proposal does not cover non-competes used by franchisors to restrict franchisees, but we recognize that in some cases they may raise concerns that are analogous to those raised by non-competes between employers and workers.”

Following public comment, the FTC stated that franchisees are expressly excluded from the definition of “worker.” Further, the FTC noted that the rule does not apply to the franchisor-franchisee relationship. Public comment seemingly impacted the outcome, because there will not be a federal prohibition on the enforcement non-compete agreements in the franchise relationship.  

In connection with the employment relationship, a non-compete agreement signals the employee’s agreement to not work for a competitor under certain conditions (such as during their employment). Most states, including New York, permit non-compete agreements in certain employment situations. However, to be enforceable, the non-compete must:

  1. Be necessary to protect the employer’s legitimate interests, 
  2. Not impose an undue hardship on the employee, 
  3. Not harm the public, and 
  4. Be reasonable in time period and geographic scope.

View the New York State FAQ on non-compete agreements.

Franchisors or franchisees should speak with a NY franchise lawyer with questions regarding the proposed rules and non-compete agreements at state and federal levels.

Contact Lusthaus Law

In addition to the updates listed above, remember that Lusthaus Law’s website is a resource for New York franchisors and franchisees. We have published two downloadable and complimentary e-books and our Insights blog is regularly updated to reflect industry trends and recent achievements in client representation. 
Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path for your franchise’s successful future.


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