USA Law and Practice Contributed by: David B. Ramsey and Michelle Murray-Bertrand, Kaufmann Gildin & Robbins LLP
graphic scope and prohibited activities, with one-year post-termination restrictions more likely to be enforce - able than longer restrictions. Some states have begun to limit or prohibit post- termination non-competition provisions in franchise agreements. For example, effective 1 July 2026, Vir - ginia expressly prohibits such covenants in franchise agreements, subject to very limited exceptions such as a franchisee’s sale of its franchised business. Cali - fornia generally restricts enforcement of post-termi - nation non-competition covenants except in very lim - ited circumstances, although some recent cases have called into question that interpretation in the context of reasonable, post-term / post-expiration non-com - petes in commercial franchises in California. Accord - ingly, franchisors must evaluate post-termination non- competition provisions on a state-by-state basis and cannot assume that a covenant enforceable in one jurisdiction will be enforceable in another. 6.3 Requiring Franchisees to Purchase Specific Goods and Services A franchisor may generally require franchisees to purchase products and services exclusively from the franchisor, its affiliates or approved suppliers. Such requirements are common in franchise systems and may apply to inventory, equipment, supplies, technol - ogy, and other products and services used in operat - ing the franchised business., but they remain subject to applicable federal and state antitrust and, in certain states, franchise relationship laws. Exclusive purchasing requirements are generally per - missible when they are reasonably related to legiti - mate business purposes, such as maintaining system quality and brand consistency, protecting the fran - chise system’s goodwill, or ensuring compliance with system standards. They may, however, raise antitrust concerns if they substantially restrict competition by limiting competing suppliers’ access to a significant portion of the relevant market. Courts generally apply a rule-of-reason analysis to balance the restriction’s competitive effects against its legitimate business jus - tifications. States that have franchise relationship laws address exclusive purchasing requirements from a different
perspective. Some states restrict franchisors from imposing unreasonable purchasing requirements, including requirements that franchisees purchase excessive or unnecessary quantities of products or inventory. Other statutes regulate supplier arrange - ments, rebates or other financial benefits that fran - chisors may receive from required purchases. The FTC Franchise Rule requires franchisors to dis - close in Item 8 of their FDD any required purchases from the franchisor, its affiliates, designated suppliers or other approved sources, including exclusive pur - chasing requirements. However, to be enforceable against the franchisee, such purchasing requirements should also be expressly set forth in, or otherwise incorporated into, the franchise agreement. 6.4 Channel Reservation A franchisor may generally reserve the right to use cer - tain channels of distribution – including the internet, e-commerce platforms, mobile applications, delivery services, national and regional accounts, non-tra - ditional locations, and other alternative distribution channels – within a franchisee’s territory, provided those rights are clearly disclosed and do not otherwise violate applicable antitrust or state franchise laws. Neither federal antitrust law nor franchise-specific statutes generally prohibit such reservations; how - ever, franchisors must adequately disclose the scope of these reserved rights to prospective franchisees. Under the FTC Franchise Rule, franchisors must dis - close (in Item 12 of their FDD) whether the franchisor or its affiliates have established or reserve the right to establish or operate other channels of distribution, such as internet sales, within the franchisee’s territory using the franchisor’s principal trade marks or other trade marks, and whether franchisees will receive compensation for such sales. Franchisors must also disclose any restrictions on a franchisee’s ability to use the internet or other channels of distribution to solicit or accept orders from customers outside its territory. These reserved rights and corresponding franchisee restrictions should also be expressly addressed in the franchise agreement to ensure consistency between the contractual terms and the FDD.
86 FRANCHISING 2026
C HAMBERS.COM
Powered by FlippingBook