For decades, franchisors have relied on post-termination restrictive covenants against competition as an important tool for protecting their brands, confidential information, customer relationships, and franchise systems after a franchisee leaves the system. But the legal landscape surrounding these provisions is changing rapidly, with courts and state legislatures increasingly scrutinizing – – and, in some jurisdictions, restricting – – the use of post-termination noncompete provisions.
California has long maintained a strong public policy against restraints on trade, while Virginia recently enacted legislation expressly prohibiting certain post-termination noncompete provisions in franchise agreements.
These developments should prompt franchisors to take a fresh look at their franchise agreements – – not simply determine whether a particular noncompete remains enforceable, but to consider whether the agreement as a whole adequately protects the franchisor when the franchise relationship ends.
Noncompete Restrictions Do Not Mean the End of Post-Termination Protections
Traditionally, franchisors have used post-termination noncompete provisions to prevent former franchisees from leveraging the knowledge, goodwill, customer relationships, and operational insight gained through the franchise relationship to compete with the franchisor. But preventing competition and protecting the franchisor’s legitimate franchise system interests are not necessarily the same objective, particularly as the enforceability of post-termination noncompetes comes under increasing scrutiny.
Even when a franchisor cannot prevent a former franchisee from competing, it continues to have legitimate interests to protect – – including its trademarks, trade dress, confidential information, proprietary systems, customer information, digital assets and other components of its franchise system.
The answer is not to simply replace a noncompete with another broad restriction or rely on a single restrictive covenant to protect these distinct interests. Instead, franchisors should assess whether their franchise agreements are structured as a coordinated framework addressing the protection, use and disposition of these assets and relationships when the franchise relationship ends.
California Has Long Been a Warning Sign
California has long served as a cautionary example for franchisors relying on post-termination restrictions. California Business and Professions Code §16600 broadly provides that contracts restraining a person from engaging in lawful profession, trade, or business are void, subject to specified exceptions. While California courts have recognized distinctions between franchise relationships and traditional employment relationships when applying these restrictions on trade, and there may be exceptions in some situations, California’s longstanding public policy against restrictive covenants remains an important consideration for franchisors.
For franchisors operating nationwide, California demonstrates why a provision that may be enforceable in one state cannot be assumed to be enforceable in another. It also illustrates the importance of structuring franchise agreements around the franchisor’s legitimate interests rather than simply relying on broad restrictions against competition.
Virginia Changes the Drafting Equation
Virginia’s 2026 legislation takes the issue a step further by expressly addressing the inclusion of post-termination noncompetes in franchise agreements. Effective July 1, 2026, Virginia’s Retail Franchising Act generally prohibits franchisors from offering or entering into franchise agreements that restrict a franchisee’s ability to engage in the retail business of offering, selling, or distributing goods or services at retail after the termination or expiration of the franchise agreement. The statute contains a narrow exception for certain voluntary franchise sales, under which a post-sale noncompete may be imposed for a period of up to two years.
For franchisors, the implications extend beyond simply removing the noncompete from their Virginia form (or excluding/narrowing it via a Virginia state-specific addendum). The franchisor should consider how the remainder of the agreement addresses the legitimate interests that the noncompete historically helped to protect.
Rethinking the Franchise Agreement’s Post-Termination Framework
When a traditional post-termination noncompete is unavailable, franchisors should resist the temptation to recreate the same restriction through a series of increasingly expansive provisions. Instead, franchisors should take a step back and evaluate whether their franchise agreements are structured as an integrated framework for protecting the franchisor’s legitimate interests during and after the franchise relationship.
Among other things, franchisors should consider whether their agreements appropriately address:
- Debranding and deidentification: What must the franchisee do immediately after termination to remove trademarks, signage, trade dress and other brand identifiers?
- Confidential and proprietary information: What information does the franchisor legitimately need to protect, and are those protections appropriately defined?
- Customer and business information: What rights does the franchisor have with respect to customer information and data generated through the franchise system?
- Digital assets: Who controls websites, domain names, social media accounts, telephone numbers, online listings and other digital assets following termination?
- Return and destruction obligations: How are proprietary materials returned, deleted or disabled?
- Transition obligations: Does the agreement provide a practical mechanism for an orderly transition following termination?
- Transfers and continuity of protections: Does the agreement preserve the franchisor’s legitimate post-termination protections when a franchise is transferred, including by clearly addressing which obligations and protections carry forward and which apply upon a subsequent termination?
- Survival provisions: Which obligations continue after the franchise agreement ends, and for how long?
The objective should not be to disguise an impermissible noncompete as another contractual provision, Rather, each provision should serve a legitimate and identifiable purpose and operate as a part of a coherent framework for protecting the franchise system.
Looking Beyond the Noncompete
As states increasingly adopt different approaches to restrictive covenants, franchisors should consider whether their existing agreements and state-specific addenda adequately address those differences. This does not necessarily mean that franchisors need entirely separate agreements for every state. It does, however, mean that franchisors should no longer assume that a provision in a national form will be appropriate – – or enforceable – – in every jurisdiction.
The changing noncompete landscape therefore presents an opportunity to take a broader view of the franchise agreement: What is the franchisor actually trying to protect and does the agreement provide an effective and legally appropriate framework for doing so?
The question is no longer whether a franchisor can stop a former franchisee from competing. The more important question is whether the franchise agreement has been thoughtfully designed to protect the franchisor’s legitimate interests when the franchise relationship ends.
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If you have questions or would like counsel on how to comply with laws governing non-compete covenants, contact us to see if we can assist you. Call Michelle Murray-Bertrand, Esq. at 212-755-3100 or [email protected].
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