IFA Issues Response to New FTC Noncompete Rule

IFA Issues Response to New FTC Noncompete Rule

Noncompete Clauses Can Stay in Franchise Agreements But Not in Employment Contracts

The International Franchise Association achieved a major victory within the Federal Trade Commission’s new ban on nearly all noncompete restrictions imposed by employers. For months the IFA had lobbied to continue using noncompete clauses in contracts between franchisees and franchisors, and the FTC rule issued on Tuesday has done so. But IFA leaders and members, contending the FTC has overreached with the regulation that widely bans noncompete agreements, continue to worry that the rule’s prohibition of noncompete employment contracts in franchising will negatively impact the business model. 

Some 30 million American workers — or about one in five — are subject to noncompete clauses in their employment contracts, the FTC estimates. The FTC predicts that after its new, almost total ban on noncompete restrictions takes effect, entrepreneurs will increase the number of start-up businesses by 2.7% per year, the equivalent of 8,500-plus new businesses launched annually. 

The FTC’s lone exception to noncompete employment contracts is for senior executives who set policy and have annual salaries of more than $151,164. The rule, scheduled to take effect in about four months but facing possible delays because of legal challenges from business organizations, also bars future noncompete employment contracts even for senior executives.

Reaction Statement from IFA 

On Thursday the IFA issued the following statement from Michael Layman, its senior vice president of government relations and public affairs: “Banning noncompetes in employment agreements will undoubtedly harm small businesses everywhere. However, 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 noncompetes 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 brands companies have built, and the local businesses franchisees run.”

IFA Pushback in 2023

In April of last year, the IFA had submitted comments in opposition to the proposed rule. The association asked the FTC not to extend its noncompete prohibitions to franchise agreements, saying, “A blanket ban on noncompete clauses in franchise agreements would be extremely damaging to the franchise business model, encourage breaches of contract, and hurt small business owners that depend on the viability of the franchise system to protect their equity in their franchised businesses.” 

The IFA also had joined more than 280 organizations in pushing back against the proposed rule as well as questioning the FTC’s authority to issue such a sweeping new rule. Their objection stated: “We strongly oppose the proposal because noncompetes serve vital business and employee interests and because the FTC lacks legal authority to issue the proposed rule.” 

The FTC’s Stance

Instead of noncompete restrictions, the FTC encourages companies to use proven, alternative trade secret laws and nondisclosure agreements to protect their proprietary information, intellectual property and other sensitive information. Researchers estimate that more than 95% of workers who have noncompete clauses in their employment contracts already have nondisclosure agreements, the FTC said in issuing its new noncompete rule. 

The FTC further asserted that employers can keep valued employees by raising their pay and improving their working conditions rather than locking them in via noncompete restrictions. These perks discourage workers from jumping ship to work at rival companies, according to the agency.

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Mary Vinnedge is an award-winning journalist who has served as editor in chief, managing editor and senior editor at national and regional publications, including SUCCESS and Design NJ magazines. She also held reporting and editing roles at The Dallas Morning News and Charlotte Observer newspapers.

Before Mary began covering franchise news and trends as a staff writer for FranchiseWire and Franchise Consultant Magazine, she developed articles on topics ranging from lifestyle, education, health and science to home projects, horticulture, gardening, interior design and architecture. These articles included her reporting on academic news at her alma mater, Texas A&M University, when Mary worked in the marketing department of the Texas A&M Foundation. She continues to be a news junkie and subscribes to several publications.

Today Mary and her husband are empty nesters living on Galveston Island near Houston. The couple’s blended family – scattered around the United States – includes five children, four grandchildren and two very spoiled, very barky miniature schnauzer rescues.
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