A franchise non-compete clause is a contractual provision that limits certain business activities for the duration of the franchise relationship. Most franchisees are aware that non-compete obligations exist, but the specific scope of the in-term clause, meaning what it restricts while the agreement is active, is often less clearly understood than it should be. What the franchise non-compete actually says and what it does not cover can be quite different from what franchisees assume.
What an In-Term Franchise Non-Compete Actually Says
An in-term franchise non-compete typically prohibits the franchisee from owning, operating, or having a financial interest in any business that is similar to, or competitive with, the franchised business during the term of the agreement. The clause protects the franchisor’s system and trade secrets by preventing the franchisee from simultaneously operating or supporting a competing business while using the franchisor’s proprietary methods.
The exact scope varies significantly from one franchise system to another. Some agreements define the prohibited activity broadly, covering any business in a related industry. Others are more specific, restricting only direct competitors within a defined geographic area. Because the franchise non-compete clause is a contractual provision rather than a universal legal standard, the language of the specific agreement determines what is and is not restricted.
What the In-Term Clause Does Not Cover
One of the most common points of confusion is the distinction between what the in-term franchise non-compete covers and what falls outside its scope. The in-term clause applies to the franchisee personally and, in many agreements, to certain immediate family members or entities the franchisee controls. It generally does not restrict employees of the franchisee from working in a competing business independently, though separate provisions may address employee solicitation.
It is also worth noting that the FTC’s rule seeking to ban non-compete agreements in most employment contexts explicitly excluded the franchisor-franchisee relationship, confirming that franchise non-compete clauses between a franchisor and franchisee remain governed by the franchise agreement and applicable state law. A federal court subsequently vacated that rule, but the exclusion of franchise relationships from the ban remains a relevant reference point for understanding how regulators have approached this area.
How the In-Term Clause Differs From Post-Term Restrictions
The in-term franchise non-compete and the post-term non-compete are two separate provisions, though they are often discussed together. The in-term clause governs what a franchisee cannot do while the franchise agreement is active. The post-term clause governs what a franchisee cannot do after the agreement ends. Both are typically disclosed in Item 17 of the FDD, but they operate independently and may have different geographic scopes, durations, and definitions of what constitutes competing activity.
In practice, the in-term clause tends to be broader in geographic scope since it applies while the franchisee is actively operating the franchised business. Courts more commonly scrutinize the post-term clause for reasonableness in duration and geography, since it restricts a person who is no longer receiving any benefit from the franchise system. Understanding the difference between the two matters because a franchisee who assumes one clause implies certain limits on the other may be mistaken.
Why the In-Term Franchise Non-Compete Matters Before Signing
The practical implications of a franchise non-compete clause extend beyond simply not opening a competing business. Depending on how the clause is drafted, it may restrict passive investments in related industries, involvement in a family member’s business, or advisory roles with other companies. As noted in analyses of franchise law, in-term non-compete clauses are generally enforceable under federal antitrust law, though certain provisions such as no-poach clauses have come under increased regulatory scrutiny. What is enforceable varies by state, and some states apply stricter standards to non-compete provisions than others.
Reviewing the franchise non-compete clause carefully before signing, and again before taking on any outside business activity during the franchise term, is a reasonable step for any franchisee. The clause is part of the agreement from day one, and understanding its scope at the outset avoids assumptions that can create problems later.
Summary
A franchise non-compete clause restricts certain business activities for the duration of the franchise relationship. The in-term clause is separate from post-term restrictions and applies while the agreement is active. The specific language of the franchise agreement defines its scope, not a universal legal standard, and that scope can vary significantly between franchise systems. The franchise non-compete remains generally enforceable in the franchisor-franchisee context under federal law, though state law adds an additional layer that varies by jurisdiction. Understanding what the in-term franchise non-compete covers, and what it does not, is an important part of knowing the obligations that come with the franchise relationship.
Franchise agreements vary in how they define and apply non-compete obligations, and the terms of the specific agreement will determine what restrictions apply during the franchise term. If you have questions about franchise non-compete provisions in general, you are welcome to reach out to the team at FortmanSpann.
The choice of a lawyer is an important decision and should not be based solely upon advertisements. Prior results do not guarantee a similar outcome. This post is for informational purposes only and does not constitute legal advice. Franchise laws and non-compete enforceability vary by state, and the information in this post may not reflect the laws applicable to your specific situation.
