The Federal Trade Commission (“FTC”) regulates the franchise industry at the federal level, requiring that franchisors provide certain disclosures (23 items) through a Franchise Disclosure Document to prospective franchisees before they sign a franchise agreement or give the franchisor any money. Individual states can adopt additional laws. Various states have done just that – requiring the filing of the Uniform Franchise Registration Application, paying of filing fees, providing notice of intent to sell franchises, to name just a few. Some states have also passed “relationship laws” that regulate the relationship between the franchisor and its franchisee. Recently, there have been some new developments among certain states adopting laws that would regulate the franchise agreements and relationships in Alabama and Washington.

Alabama

Recently, the Alabama state Senate passed Senate Bill 129 (companion House Bill 352), which would regulate the franchise relationship in Alabama. The bill regulates, for example, the way in which a franchise agreement can be terminated (prohibiting termination or nonrenewal without “good cause”). The bill dictates the venue for any dispute between the franchisor and franchisee. In the case of a disagreement between a franchisor and franchisee, the case would have to be litigated in the state of Alabama, rather than the state of the franchisor (or any other venue dictated in the franchise agreement). A copy of SB129/HB352 can be found here.

Many franchise systems and the International Franchise Association oppose the bill. It is now awaiting action by the House of Representatives. 

Washington

Moving across the country, the state of Washington has passed a new law that would limit non-compete provisions in contracts with independent contractors and employees. Although this new law is not aimed solely at the franchise industry (it has a much broader reach), it will have some significant influence on franchise relationships in Washington. Indeed, the new law actually stemmed from certain settlement agreements reached in March 2019 of three cases that were filed by private plaintiffs, challenging “no-poaching” provisions in franchise agreements of Auntie Annie’s, Arby’s and Carl’s Jr. in the Eastern District of Washington. 
Effective January 1, 2020, the new law has three important components:

First, the law places new conditions on the use of non-compete agreements by which an employee or independent contractor is prohibited from engaging in a lawful profession, trade or business of any kind. Non-competes will only be enforceable against W-2 employees earning $100,000 annually or independent contractors earning $250,000 or more annually; the duration of any non-compete must not exceed 18 months without clear and convincing evidence that a longer duration is necessary; and additional consideration must be paid if the covenant is entered into after the term of employment.

Second, the law bans non-solicitation provisions in a vertical franchise agreement. In other words, a franchisor cannot restrict or prohibit in any way, a franchisee from soliciting or hiring any employee of either the franchisor or another franchisee of the same franchise system.

Third, an employer may not prohibit an employee earning less than twice the state minimum wage from “moon-lighting” (having another job, being self-employed or working as an independent contractor) unless the work raises legitimate concerns regarding safety, interferes with scheduling or creates conflicts of interest.

This new law has broad reaching effects. Franchisors are encouraged to review restrictive covenants in their franchise agreements for those franchisees in the state of Washington to ensure they are in compliance with this new law when it takes effect January 1, 2020.

For more information, contact Christina Fugate or another member of our Franchise and Distribution Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.