Red Flags in Franchise AgreementsDrafting to Preserve Enforceability and Brand Value

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I wish to thank Rachel Roth, an Akerman 2026 Summer Associate, for her assistance and contributions to this article.

Franchising remains one of the most durable engines of business growth in the United States, with the International Franchise Association projecting a 1.5% increase in franchise establishments, 150,000 new jobs, and an output of $921.4 billion in 2026. Yet the same features that make franchising attractive—brand licensing coupled with meaningful control over a franchisee’s operations—also generate legal exposure that a poorly drafted agreement can magnify.¹ This article examines some recurring “red flags” in franchise agreements in the following areas: (1) non-compete; (2) joint-employer; (3) antitrust; (4) IP ownership; (5) artificial intelligence; and (6) termination. Each section reviews the statutory and case-law landscape governing these issues, and also draws on established practitioner guidance where useful.

1. Non-Compete

In franchising, covenants not to compete generally serve to prevent a franchisee from selling competing products or services during, and for a period after, the franchise agreement termination. Courts distinguish sharply between in-term and post-term covenants: in-term covenants are generally enforced even where their terms would seem unreasonable in other contexts, while post-term covenants receive close scrutiny.²  Enforceability is primarily a function of state law, and because many states disfavor these restraints, they are generally enforceable only to the extent they are reasonable in duration, geographic scope, and the defined scope of prohibited competition.³

Certain strategic measures can help preserve the enforceability of non-compete provisions. The competing-industry definition should be tailored to the franchisor’s legitimate business interests rather than general competition; a broad prohibition on ordinary competition is not itself a protectable interest.⁴ Geographic scope should be limited to the area genuinely necessary to protect the franchise system—for example, a defined radius around the franchisee’s authorized location rather than a nationwide bar. Duration should be conservative; although two-year post-term restrictions within a 50-mile radius have historically been common in franchise agreements, the current enforcement climate counsels keeping the period under two years, and preferably at one year or less, to improve the odds of enforcement. Overbreadth in any dimension risks the entire covenant, because some states will “blue-pencil” or equitably reform an offending clause while others will void the covenant altogether if a single provision is unreasonable.⁵

Franchise agreements must also account for state laws that sharply restrict or ban non-competes. California voids the vast majority of covenants not to compete by statute, and the California Supreme Court in Edwards v. Arthur Andersen LLP rejected a judicially created “narrow restraint” exception, holding that non-competes are invalid unless expressly authorized by statute.⁶ But more recently, in Ixchel Pharma, LLC v. Biogen, Inc., the California Supreme Court reaffirmed that section 16600 of the California Business and Professions Code renders employee non-competes void as a matter of law; however, the court clarified that a “rule of reason” standard—rather than the stricter per se rule—governs competitive restraints on business operations and commercial dealings.⁷ Further, in BrightStar Franchising, LLC v. Foreside Management Company, an Illinois district court held that Ixchel extends to post-termination covenants in the commercial context, and that the franchise agreements at issue, which contained post-termination covenants, were commercial contracts subject to the rule of reason.⁸ Other states, including Georgia and Nebraska, have general statutory rules against restraints of trade, although Georgia amended its constitution in 2010 to permit the Georgia Restrictive Covenants Act.⁹ Because the franchisor’s home-state law is usually chosen to govern, counsel should review both the chosen law and the franchisee’s home-state law, recognizing that the same covenant will not receive equal protection in every jurisdiction.

Even where a state broadly disfavors non-competes, well-recognized exceptions may still permit their use. California, for example, exempts covenants entered into in connection with the sale of a business’s goodwill or ownership interest, or the dissolution of a partnership or limited liability company under Business and Professions Code sections 16601 through 16602.5, on the theory that the purchaser’s expectation of an unencumbered asset outweighs the seller’s interest in future competition. Many states also preserve narrower carve-outs tied to the protection of trade secrets and confidential information, and several of the newer statutes limiting non-competes exempt highly compensated employees or executives above a specified income threshold, or condition enforceability on the payment of garden-leave or other compensation during the restricted period.¹⁰ Notably, in Massachusetts, a forfeiture for competition agreement—one that imposes a financial consequence on a former employee only if the employee chooses to engage in competitive activities—is treated as a non-compete agreement, whereas a plain forfeiture agreement—triggered by departure regardless of competitive activity—is excluded from the definition.¹¹ However, in LKQ Corp. v. Rutledge, the Seventh Circuit affirmed the district court’s ruling that forfeiture for competition agreements is treated under regular contract principles under Delaware law, and certified other questions to the Delaware Supreme Court.¹² Franchise counsel should confirm whether a given restriction can be structured to fit within one of these narrower exceptions before assuming that a state’s general hostility to non-competes forecloses enforcement altogether.

State efforts to limit or prohibit employee non-competes have gained significant momentum, even as federal rulemaking has stalled—the FTC abandoned its 2024 non-compete rule following Ryan LLC v. FTC and now pursues case-by-case enforcement, and the NLRB rescinded its prior guidance treating non-competes as presumptively unlawful.¹³ Thirteen states enacted non-compete legislation in 2025, with additional restrictions taking effect in 2026, though New York’s own ban (S4641/S9759) remains stalled in the Assembly and the related New York City Council bills (Int. 0140-2024, Int. 0146-2024, Int. 0375-2024) remain pending.¹⁴ The prudent course is to treat franchisee-level and employee-level covenants separately, tailor each narrowly, and revisit them as the law continues to shift.

2. Joint-Employer

Franchise agreements differ from ordinary brand-license agreements precisely because they permit the franchisor greater control over business operations to protect system and brand standards. A joint employer is an entity that, together with another employer, shares or codetermines the essential terms and conditions of employment for the same workforce—such as hiring, firing, discipline, supervision, wages, and scheduling—such that both entities can be held jointly and severally liable for wage-and-hour, labor, discrimination, and benefits obligations with respect to those employees.¹⁵ The joint employer red flag arises when a franchisor exerts so much control over the franchisee that the franchisor becomes a joint employer of the franchisee and/or its employees, exposing the franchisor to liability it never intended to assume.

The dividing line has been a moving target. In October 2023, the NLRB issued a Joint Employer Rule that would have deemed a franchisor a joint employer if it possessed any authority to control any essential term or condition of employment—direct or indirect, exercised or not. A federal district court in Texas struck that rule down in March 2024, the NLRB initially appealed and then withdrew the appeal in July 2024, and as a result the more franchisor-favorable 2020 rule remains in effect.¹⁶ Under the 2020 rule, joint-employer status requires “substantial direct and immediate control” over essential terms and conditions of employment.¹⁷

Even under today’s more permissive joint-employer standard, careful drafting and consistent operational practices remain critical. The prudent approach is for the franchisor to retain control over brand standards and important systems and operations while leaving true employment decisions to the franchisee. This means the franchisor should not dictate hiring or firing decisions; should use a “train the trainer” approach, instructing the franchisee’s designated trainer rather than using franchisor line-level employees directly; should refrain from imposing mandatory hours of operation framed around staffing rather than brand requirements; and should avoid prescribing employee conduct standards, discipline, scheduling, or wage terms. A related misclassification risk runs the other way: aggressive control can also cause a franchisee (or its principals) to be characterized as the franchisor’s employee rather than an independent contractor, which is one reason franchisors increasingly require franchisees to operate through an entity.¹⁸ The agreement should therefore expressly disclaim any employment or agency relationship, confirm the franchisee’s sole responsibility for its personnel, and be matched by operational conduct consistent with that allocation.

3. Antitrust

Section 1 of the Sherman Act requires concerted action, and courts historically treated the vertical franchisor-franchisee relationship—rooted in the licensing of brand IP and mandatory supply arrangements—as subject to the more lenient rule of reason rather than per se condemnation.¹⁹ That comfort has eroded in the context of no poaching provisions in franchising agreement where franchisees and/or their employees are precluded from moving to competing franchises, and sometime to other franchisees in the same system. After the DOJ and FTC issued 2016 guidance stating that “naked” wage-fixing and no-poach agreements among competing employers are per se illegal, plaintiffs began challenging no-poach clauses in franchise systems, arguing they suppress worker wages.

The case law is now genuinely unsettled. In Arrington v. Burger King Worldwide, Inc., the Eleventh Circuit held that plaintiffs adequately pleaded that no-hire agreements constituted concerted action under the Sherman Act because franchisors and franchisees “each separately pursue their own economic interests when hiring employees” and no-hire agreements deprived each franchisee of decision-making about hiring, and therefore of actual or potential competition.²⁰ Courts have divided over whether the per se rule, the more lenient “quick look” rule, or the full rule of reason applies. Most significantly, in Deslandes v. McDonald’s, the Seventh Circuit vacated judgment for McDonald’s, holding that the district court “jettisoned the per se rule too early” and that the workers had alleged a horizontal restraint because McDonald’s operated corporate stores that competed with franchised outlets for the same labor.²¹ The court rejected the argument that the no-poach clause was a permissible ancillary restraint justified because the franchise system “expand[ed] the output of burgers and fries,” reasoning that consumer-side output benefits cannot justify monopolistic harm to workers. In March 2024 the Supreme Court denied McDonald’s petition for certiorari, leaving the Seventh Circuit’s ruling intact until the lower court on remand determinates which rule to apply.²²

The practical implications for drafters are straightforward in the no-poach red flag context. Franchisors should consider eliminating no-poach and no-hire clauses from franchise agreements entirely, and should train personnel to steer clear of forming unwritten, informal no-poach understandings with franchisees—since such informal arrangements can carry the same exposure to treble damages and fee awards as written provisions. Where a restrictive covenant truly cannot be avoided, counsel should coordinate with antitrust specialists to limit risk: verifying that the relationship is genuinely vertical, restricting the covenant’s application to multi-unit operators under single ownership, and drafting the clause as narrowly as possible while documenting the legitimate system interests it is designed to protect. Another approach to consider employing, similar to the non-compete context, is to apply and enforce trade secret and confidential/proprietary information provisions and policies in the workplace. While that may not work for employee movement within a franchise system, it could successfully work when employees seek to leave for a competing system. Franchisors should further examine their franchisee compensation practices and keep a close eye on the Deslandes remand, since a finding of per se liability would signal that every agreement containing such clauses needs revision.

4. IP Ownership

A franchise is, at its core, a license of the franchisor’s marks, trade secrets, and system know-how. A frequently overlooked red flag is the fate of improvements that a franchisee develops while operating under that license—new recipes, processes, software configurations, marketing techniques, or product innovations. Absent a clear contractual assignment, default intellectual-property rules can leave those improvements in the hands of the franchisee who created them. Under U.S. patent law, an invention presumptively belongs to the inventor unless there is an effective assignment,²³ and under copyright law, a work belongs to its author unless it qualifies as a work made for hire or is assigned to the franchisor in a signed writing.²⁴ A franchisor that assumes it automatically owns everything developed within its system may find a former franchisee free to exploit—or license to competitors—valuable innovations that the franchisor helped make possible.

The franchise agreement should therefore include an express, present-tense assignment obligating the franchisee (and its employees) to assign to the franchisor all right, title, and interest in any improvements, modifications, derivative works, and new developments relating to the marks or system, together with a further-assurances clause requiring execution of any documents needed to perfect and record that assignment. This mirrors the franchisor’s broader practice of reserving rights specifically and completely rather than relying on implication, a discipline long emphasized in the analogous territorial-rights context of franchise agreements. The assignment should be paired with the confidentiality and post-term provisions so that the franchisor’s ability to protect its system-wide information—already recognized as a legitimate business interest supporting enforcement of restrictive covenants—extends to improvements as well. Because the license grant and IP-ownership questions are typically carved out for court (rather than arbitral) resolution and injunctive relief, a clean chain of title materially strengthens the franchisor’s enforcement position.

5. Artificial Intelligence (AI)

Artificial intelligence is a fast-developing area of operational and regulatory risk that now warrants express red flag treatment in franchise agreements.

The franchise agreement should define permissible and impermissible franchisee uses of AI tools in operations, marketing, customer interactions, and content creation. In addition, the franchisor should address how the franchisee may need to allocate ownership of AI-generated outputs (which may not be protectable by copyright when generated without sufficient human authorship);²⁵ and require compliance with the franchisor’s data-privacy, brand-voice, and quality-control standards. Provisions should also protect the franchisor’s proprietary data from being ingested into third-party AI models (thereby destroying the confidentiality and proprietary nature of such data) and confirm that any AI-assisted improvements fall within the franchisee’s assignment obligation discussed above. Because a patchwork of state AI statutes is emerging, franchise agreements should include a compliance-with-applicable-law mechanism to update AI standards as the law develops consistent with the franchisor’s general reservation of the right to evolve system standards over time.²⁶

By way of example, New York has moved to the forefront of AI regulation in ways that bear directly on franchise marketing. New York’s Governor Hochul has signed a series of AI-related measures, including the AI Transparency in Advertising Act, which will require a conspicuous disclosure when an AI-generated synthetic “performer” appears in advertising produced or created for distribution in New York,²⁷ and the Posthumous Right of Publicity Expansion Act, which requires the consent of a deceased individual’s heir or executor before his or her AI-generated or digitally recreated likeness is used commercially. Both statutes arguably reach national franchise creative campaigns distributed in or targeted to New York, as well as franchisee-localized content and social media. Consequently, a franchise system need not be headquartered in New York—or operate a location there—to trigger compliance obligations, and violations can carry civil and statutory damages exposure.²⁸

New York’s approach may be a leading indicator of where AI regulation in commerce and advertising is headed nationally—i.e., toward mandatory disclosure, consent, and accountability rather than treating AI merely as an unregulated innovation. Other states are likely to adopt similar synthetic-performer disclosure and posthumous-likeness consent requirements in the coming years, so franchise systems operating across multiple states should not treat New York’s rules as a one-off compliance burden. Franchise counsel should therefore conduct rights audits, build AI-specific appendices and disclosure templates into the franchise agreement and operations manual, incorporate AI compliance into annual Franchise Disclosure Document (FDD) updates and vendor-management programs, and clearly allocate responsibility for disclosure and consent between franchisor and franchisee—positioning the system to adapt as additional states follow New York’s lead.

6. Termination

Perhaps the most consequential red flag is the franchisor’s frequent overestimation of its ability to terminate. Default and termination provisions are central to a franchisor’s ability to enforce system standards, but a number of states have franchise relationship laws that override the agreement’s terms, and most require “good cause” to terminate.²⁹ The franchise agreement can be a useful tool for defining what constitutes good cause in a given system, but drafting that ignores these relationship laws and can create unrealistic expectations for both sides. Well-drafted agreements pattern their enumerated default events on relationship-law provisions and expressly provide that, where any law requires longer notice than the agreement, the statutory period governs and the term is extended accordingly.

Notice and cure requirements are the second trap. Statutory notice periods can be lengthy—running as long as 180 days for non-renewal in some jurisdictions and up to a year under Washington law—and some states require compensation to the franchisee on non-renewal.³⁰ Illinois, for example, requires the franchisor to compensate the franchisee for the decrease in value of the business on non-renewal unless the non-compete is waived and 180 days’ notice was given. Counsel must therefore check the specific relationship and non-renewal statutes in every state where the system operates, rather than relying on the contract’s stated cure periods.

Termination without cause is especially fraught. While a sophisticated franchisee may negotiate mechanisms permitting the franchisor to exit—buyout provisions, liquidated damages, or fees keyed to lost royalties—those provisions may not be enforceable. Courts may see clauses that convert an unenforceable non-compete into an obligation to pay half of the royalties the franchisee would have paid as simply another (economic) restraint of trade.³¹ Liquidated-damages clauses more generally must reflect a reasonable pre-estimate of damages rather than an unenforceable penalty.³²

The practical guidance to address this red flag is to build in generous statute-compliant notice and cure periods, define good cause with specificity, reserve the right to seek injunctive relief against holdover franchisees notwithstanding any arbitration clause, and treat any negotiated no-cause exit or buyout as a provision whose enforceability must be independently assessed under the governing relationship law.

Conclusion

The common thread across these six red flags is that control and breadth, unchecked, become liabilities. Non-competes that reach too far, operational control that tips into joint employment, no-poach clauses that invite antitrust scrutiny, silence on IP improvements and AI, and termination provisions drafted without regard to state relationship laws each convert a growth tool into a source of disputes, regulatory exposure, and brand dilution. The better practice is to reserve rights specifically, tailor restraints narrowly, align contract language with actual operational conduct, and revisit the agreement as the legal landscape continues to shift.

Footnotes

1. Timothy J. Bryant, Susan A. Grueneberg & Jane W. LaFranchi, Keep It Simple! Drafting a Pragmatic Franchise Agreement Against the Backdrop of Over Fifty Years of Franchise Law Precedent, ABA 35th Annual Forum on Franchising (Oct. 3–5, 2012).

2. See Great Frame Up Systems, Inc. v. Jazayeri Enterprises, Inc., 789 F.Supp.253, 255-56 (N.D. Ill. 1992); Handel’s Enterprises, Inc. v. Schulenburg, 2020 WL 419158, *9 (N.D. Ohio 2020).

3. See CA Bus. & Prof. Code §§ 16600-16602.5; O.C.G.A. §§ 13-8-50-13-8-59.

4. See Automile Holdings, LLC v. McGovern, 483 Mass. 797 (2020) (protection from ordinary competition is not a legitimate business interest).

5. See, e.g., Dent Wizard Int’l Corp. v. Brown, 272 Ga. App. 553 (Ga. Ct. App. 2005) (illustrating that some courts void an entire covenant containing an offending provision rather than blue-penciling it).

6. Cal. Bus. & Prof. Code § 16600 et seq. (2025); Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 949–50 (2008); see also Campbell v. Bd. of Trustees of Leland Stanford Jr. Univ., 817 F.2d 499 (9th Cir. 1987) (pre-Edwards narrow-restraint approach).

7. Ixchel Pharma, LLC v. Biogen, Inc., 9 Cal.5th 1130 (2020).

8. BrightStar Franchising v. Foreside Management Company, 808 F.Supp.3d 870, 880-82 (N.D. Ill. 2025).

9. Ga. Const. Art. III, § 6, ¶ 15; O.C.G.A. § 13-8-50 et seq. (2024) (Georgia Restrictive Covenants Act); Neb. Rev. Stat. § 59-801 (2025).

10. See Mass. Gen. Laws ch. 149, § 24L (2026); Minn. Stat. § 181.988 (2025); Wash. Rev. Code § 49.62.020 (2026); D.C. Code § 32-581.01(10), (13), (15) (2026).

11. See Mass. Gen. Laws ch. 149 § 24L(a) (2026).

12. LKQ Corp. v. Rutledge, No. 23-2330 (7th Cir. 2024).

13. See Ryan LLC v. FTC, 746 F.Supp.3d 369 (N.D. Tex. Aug. 20, 2024).

14. These states are Arkansas, Colorado, Florida, Illinois, Indiana, Maryland, Montana, New Hampshire, Oregon, Texas, Utah, Virginia, and Wyoming. Counsel should confirm the current status of federal and state non-compete initiatives, including the New York City Council bills (Int. 0140-2024, 0146-2024, 0375-2024).

15. Browning-Ferris Industries of California, Inc. v. National Labor Relations Board, 911 F.3d 1195, 1200-02 (D.C. Cir. 2018).

16. Chamber of Commerce of the U.S. v. NLRB, No. 6:23-cv-00553 (E.D. Tex. Mar. 8, 2024).

17. See 29 C.F.R. § 103.40.

18 See Awuah v. Coverall N. Am., Inc., 707 F. Supp. 2d 80 (D. Mass. 2010) (applying Mass. Gen. Laws ch. 149, § 148B to franchisee misclassification).

19. Sherman Act § 1, 15 U.S.C. § 1.

20. Arrington v. Burger King Worldwide, Inc., 47 F.4th 1247 (11th Cir. 2022).

21. Deslandes v. McDonald’s USA, LLC, 81 F.4th 699 (7th Cir. 2023).

22. McDonald’s USA, LLC v. Deslandes, cert. denied (U.S. Mar. 2024)

23. 35 U.S.C. § 261 (ownership & assignment); see Bd. of Trustees of Leland Stanford Jr. Univ. v. Roche Molecular Sys., Inc., 563 U.S. 776 (2011) (rights in an invention initially vest in the inventor absent an effective assignment).

24. 17 U.S.C. §§ 101, 201 (work made for hire; transfer of copyright ownership requires a signed writing).

25. See Thaler v. Perlmutter, 687 F. Supp. 3d 140 (D.D.C. 2023) (a work generated without human authorship is not copyrightable); U.S. Copyright Office, Copyright and Artificial Intelligence guidance (2023–2025).

26. See, e.g., Colorado AI Act, Colo. Rev. Stat. § 6-1-1701 et seq. (S.B. 24-205); cf. emerging state AI legislation.

27. AI Transparency in Advertising Act, S.8420-A/A.8887-B (N.Y.), effective June 9, 2026 (requiring conspicuous disclosure of AI-generated “synthetic performers” in advertising produced or created for distribution in New York; civil penalties of $1,000 for a first violation and $5,000 for each subsequent violation); see Marc Lieberstein, How New York’s New AI Laws May Reshape Brand and Franchise Compliance, N.Y.L.J. (Jan. 2026).

28. Posthumous Right of Publicity Expansion Act, S.8391/A.8882 (N.Y.), effective December 11, 2025 (requiring heir or executor consent for commercial use of a deceased individual’s AI-generated likeness; statutory damages of $2,000 or actual damages plus potential punitive damages).

29. See, e.g., Cal. Bus. & Prof. Code § 20020; Haw. Rev. Stat. § 482E-6(2)(H); Wash. Rev. Code Ann. § 19.100.180(2)(j).

30. See, e.g., Wash. Rev. Code §§ 19.100.180–.190; 815 Ill. Comp. Stat. §§ 705/18–705/26; Cal. Bus. & Prof. Code §§ 20000–20044; Minn. Stat. § 80C.14.

31. See CA Bus. & Prof. Code § 16600.

32. Priebe & Sons v. U.S., 332 U.S. 407 (1947).

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