Legislatures are not pleased. Franchisors are accused of overreaching with employment restrictions. New governmental intervention into the franchise relationship requires companies to perform high level reviews of their offering documents. Franchisors seeking to enforce limitations on competition should revisit their franchise agreements, particularly in certain states.

Effective immediately, franchisors subject to the new Minnesota law are prohibited from enforcing “no-poach” and nonsolicitation provisions, restricting franchisees from soliciting or hiring an employee from another franchisee of the same franchisor or from the franchisor itself. The Minnesota law also invalidates any existing provision that violates these new prohibitions. Within one year, franchisors must also amend existing franchise agreements to remove any restrictive employment agreement that violates the new Minnesota law. In the alternative, a franchisor can sign a memorandum of understanding acknowledging that any existing provisions that violate the new law are void and unenforceable and provide notice to the franchisee of their rights and obligations under the new law. This follows a new Minnesota law invalidating non-compete agreements generally and provides Minnesota venue to any dispute regarding the activity restrictions.

The Minnesota legislation shows the trend toward eliminated no-poach and nonsolicitation agreements. The state of Washington adopted similar legislation in 2020. In 2019, four national fast food franchisors agreed to cease using “no-poach” agreements that restrict the rights of fast food workers to move from one franchise to another within the same restaurant chain. The agreements with Dunkin’, Arby’s, Five Guys and Little Caesars settle an investigation announced by the 16 states, spearheaded by Pennsylvania and Massachusetts, over concerns that no-poach agreements hurt low-wage workers by limiting their ability to secure better paying jobs.

No poach clauses and no solicitation clauses are post-employment restrictions against competition. In franchise agreements, these clauses usually are drafted to prevent franchisees from raiding the employees of other franchisees or of the franchisor. Sometimes, these clauses appear in agreements with critical vendors and business partners, so that no raids will cannibalize the staff. Application of the clauses stabilize the staff of the contracting parties but restricts the mobility of their employees. The subject employees did not agree to these restrictions, nevertheless, an invisible hand eliminates their opportunities.

In contrast, covenants not to complete are restrictions on competition, both during the term of the franchise agreement and after. These are evaluated based on the scope of the restriction, the period of the restriction and the geographic scope of the restriction. The in-term covenant against competition usually precludes engaging in competitive activity which would be disloyal to the franchisor or would impact the franchised business, and with a few exceptions, need not be limited in geographic scope. The post-term covenant precludes competition against the franchisor or other franchisees, and to be enforceable, must be reasonably limited in scope, time, and geography.

As restrictions on competition, these clauses may be regulated by federal antitrust laws, state antitrust laws and state common law. Certain states, like California and Washington, prohibit the enforcement of such restrictions as against public policy, subject to certain exceptions. Franchisors must review their offerings, and perhaps amend their agreements to comply with this new trend:

• Franchisors who sell in Minnesota require special attention.
• Activity restrictions in existing franchise agreements need to be re-evaluated in light of changing jurisprudence.
• No-poach agreements may need to be eliminated. In many instances will be difficult to enforce, and even the inclusion of such a provision in a franchise agreement may lead a court to conclude that the franchisor is overreaching in other aspects of the franchise relationship.
• Franchisors with legitimate business interests requiring activity restrictions should be able to link the provisions to protection of confidential information and to tailor the provisions as narrowly to demonstrate reasonableness.
• Geographic reasonableness and nonsolicitation should be reviewed and tailored in light of social networking and technological advancements.

As an operational issue, updating confidential information policies and agreements, including reevaluating how employees are provided with access to the franchisor’s highly sensitive and confidential information. Because franchisors may lose their ability to have effective tools for preventing unfair competition, franchisors should consider limiting the distribution of sensitive information to reduce possible exposure. Franchisors and their franchisees should consider implementing systems that limit, control, and track access to company confidential information and trade secrets to mitigate the risk of misuse when covered employees and independent contractors go to work for competitors.

Activity restrictions in franchise agreement protect the branding, the uniqueness, the competitive advantages through innovation, and the secrets of success of the franchisor. Now is the time to give a new look to the tools being used to protect these most important assets.

Reprinted with permission from the June 15, 2023, issue of The Legal Intelligencer© 2023 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.