Franchising 2026

USA Law and Practice Contributed by: David B. Ramsey and Michelle Murray-Bertrand, Kaufmann Gildin & Robbins LLP

6. Restrictions on Competition in Franchise Agreements 6.1 Treatment of Competition Restrictions in Franchise Agreements Unlike some foreign jurisdictions, the United States does not maintain a separate body of competition law specifically governing franchising. Instead, competi - tion-related issues arising in the franchise context are generally governed by federal and state antitrust laws. Indeed, in the United States, the terms “competition law” and “antitrust law” are often used interchange - ably. US antitrust law at the federal level (applicable throughout the USA, its territories and possessions) is principally embodied in the Sherman Act, the Clayton Act and the FTC Act, and at the state level is embod - ied in comparable antitrust state statutes. These laws collectively seek to preserve competitive markets by prohibiting unreasonable restraints of trade and other anti-competitive conduct. Although these statutes were not enacted specifically to regulate franchising, they nevertheless influence the franchise relationship by establishing limits on contractual restrictions and business practices that may affect competition. Antitrust considerations typically arise after a fran - chise relationship is established or when a franchisor’s conduct affects market competition. Franchise agree - ments frequently contain competitive restraints, including territorial protections, in-term and post-term non-competition covenants, customer and employee non-solicitation provisions, pricing restrictions, exclu - sive supply arrangements, resale restrictions, and oth - er vertical restraints. While these restrictions may limit certain aspects of a franchisee’s competitive freedom, courts have generally recognised that they may serve legitimate business purposes, including protecting trade marks and other IP, maintaining system-wide standards and uniformity, protecting the franchisor’s investments in the franchise system, and preserving brand consistency and goodwill. Restrictive provisions in franchise agreements are not inherently unlawful. Most franchise-related restraints are evaluated under the “rule of reason”, which exam - ines whether the restraint is reasonably related to legitimate business objectives and balances those objectives against any actual or potential harm to

chisor to be permitted to terminate the franchise agreement, and in some states require that the fran - chisee receive a minimum amount of prior notice and opportunity to cure (such as 30 or 60 days) before termination is permitted. There are typically excep - tions for certain types of franchisee defaults where no notice or cure period (or a shorter period) is required prior to termination. At the federal level, the FTC Fran - chise Rule does not impose any particular restrictions on a franchisor’s termination rights. The following states/territories have relationship laws restricting termination rights of franchisors with gen - eral applicability (not limited to specific industries): Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Michigan, Minnesota, Missis - sippi (except no “good cause” requirement applies there), Missouri (but with no specific “good cause” requirement), Nebraska, New Jersey, Puerto Rico, Rhode Island, Virginia, the U.S. Virgin Islands, Wash - ington and Wisconsin. Local mandatory law does not generally grant statu - tory termination rights to the franchisee specifically. However, in many states and under common law in the United States generally, if one party materially breaches a contract, the other party is permitted to terminate the contract based on that material breach even if the contract does not expressly permit it to do so. This concept may apply to franchise agreements as well, depending on the context and the extent of the breach. In addition, the concept of an implied cov - enant of good faith and fair dealing has been held to apply to every franchise agreement regardless of whether it is expressly stated in the agreement. If a franchisor’s breach of material obligations under a franchise agreement is egregious enough to violate that implied covenant, the breach may – depending on the circumstances, any specific contrary language in the contract, and applicable law – support the fran - chisee’s decision to unilaterally terminate the agree - ment.

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