The Franchise Non-Compete Clause the FTC Rule Never Touched

The Federal Trade Commission's national noncompete ban is effectively dead. A federal court blocked it nationwide in August 2024, and the FTC abandoned its appeal a year later. Franchise development teams have been quietly relieved about that outcome, and there is a reasonable case for relief if you are the one who drafted the agreement. There is also a detail that gets skipped in the relief: even while the rule was alive, it was never going to reach the clause a departing franchisee actually signs. The FTC's own definition of a covered worker excluded the franchisee-franchisor relationship. A franchise non-compete clause sitting in Item 5 or Item 13 of your FDD was outside the rule's reach before a single judge weighed in.

What the ban actually covered, and what it didn't

The FTC proposed its noncompete rule in 2023 and finalized it in April 2024, aiming to bar most employers from enforcing noncompete agreements against workers nationwide. A Texas federal court vacated it nationwide on August 20, 2024, in Ryan LLC v. FTC. The agency appealed to the Fifth Circuit, then dismissed that appeal in September 2025. By a January 2026 public workshop, the FTC had dropped the idea of a categorical ban altogether and shifted to a case-by-case approach, using its Section 5 authority to challenge individual noncompetes it considers unfair, mostly aimed at lower-wage employees with limited bargaining power.

None of that history ever applied to the clause franchise operators sign. The rule's definition of "worker" covered natural persons employed by a business, including employees of a franchisee or franchisor. It did not cover a franchisee acting as a franchisee, the business owner bound by the franchise agreement itself. The ban, had it survived, would have protected a store manager. It was never built to protect the person who signed the development agreement.

The clause that was never on the table

A post-term non-compete in a franchise agreement restricts a departing franchisee from operating a similar or competing business for a set period after the relationship ends, whether that end comes through termination, non-renewal, expiration, or transfer. It is distinct from the in-term non-compete that applies while the agreement is active and rarely gets contested, since the franchisee is still bound by the deal they signed. The post-term version is the one that survives the relationship, and the one most franchisees only read closely on their way out.

Typical terms run one to two years in duration and a radius of five to twenty-five miles around the former location, sometimes stretching to fifty miles in systems that also want to protect nearby franchised or company-owned units. None of that language changed when the FTC rule collapsed, because none of it was ever inside the rule's scope.

Why a franchise non-compete clause still needs a rationale

The pressure on that clause is coming from a different direction: state securities regulators. On January 27, 2025, the Franchise and Business Opportunities Project Group of the North American Securities Administrators Association issued formal guidance stating that post-term non-competes in franchise agreements should be reasonable, and it put the burden of proving that on the franchisor.

NASAA's framework tests four things: whether the clause's scope is narrow enough to protect a legitimate interest without blocking the franchisee from using general business experience elsewhere, whether the duration reflects how long it would actually take to replace the departing operator and re-establish the brand's presence in that market, whether the industry is fast-moving or mature (a rapidly changing category justifies a shorter restriction than a stable one), and what other steps the franchisor already takes to protect the brand, such as training, trademark enforcement, and confidentiality terms. A clause that fails that test is not automatically void, but a franchisor now has to defend it with more than the fact that it was in the agreement everyone signed.

Where this actually bites: registration, not just litigation

A contract dispute over a non-compete only surfaces when a franchisee leaves and a franchisor decides to enforce it. NASAA's guidance changes the timing. In the roughly fourteen states that require franchise registration, examiners reviewing an FDD for renewal now have a coordinated, citable standard for flagging a post-term covenant as unreasonable before any unit ever changes hands. That is a new friction point sitting on top of the FDD renewal deadline itself: a brand can show up for its annual registration renewal with clean financials and a current disclosure document, and still get held up because the non-compete language in Item 13 has not been touched since the system had a third as many units.

Auditing the clause before an examiner does

A few checks are worth running before the next registration cycle rather than during it. Match the duration and radius against documented time to refill a territory and reopen a comparable unit, not a default carried over from a template built for a different concept. Confirm the radius reflects actual trade-area overlap rather than a flat number every unit in the system shares regardless of market density. Write down the brand-protection steps already in place (training completion records, trademark enforcement history, confidentiality provisions) so the reasonableness argument does not rest on the covenant alone. Check whether the clause treats a single-unit exit the same as a multi-unit transfer, since a blanket restriction applied to both is the version examiners scrutinize hardest. And revisit anything drafted more than three or four years ago, since the market conditions that justified those original terms, how fast a territory could be refilled, how mature the category was, may no longer hold.

Franchise intelligence platforms, including Revscale, can flag legal and compliance documents due for this kind of review alongside FDD renewal deadlines. The judgment about what counts as reasonable still belongs to whoever signs off on the agreement.

The burden sits with whoever wrote the clause

NASAA's guidance flipped the default assumption franchisors have relied on for years. A post-term non-compete used to hold up unless a departing franchisee challenged it directly and won. Now the burden of proving it is reasonable sits with the franchisor from the moment a state examiner opens the file, not from the moment a dispute lands in court. A franchise non-compete clause that has not been reread since the year it was drafted is quietly underwriting a legal position nobody in the organization has actually stress-tested.