How-to guide: Issues to consider when drafting a franchise agreement (USA)

Introduction

This guide will assist in-house counsel and private practice lawyers, and compliance professionals who advise companies in the United States that engage in franchising activities. It will assist them in drafting a franchise agreement and evaluating and mitigating antitrust law risks. It sets out key issues to address and points to consider when developing internal processes when drafting a franchise agreement.

The guide covers:

1. An overview of franchise agreements
2. Drafting franchise agreements
3. Assessing antitrust risk in franchise agreements

The requirements for compliance with antitrust laws may be governed by federal and state laws. The discussion in this guide should be taken as a general statement of the laws applicable in most US jurisdictions and not as a comprehensive summary. You are advised to consult both federal and state laws before beginning to develop an antitrust risk assessment program.

This guide can be used in conjunction with the following How-to guides: Understanding antitrust and unfair trade practices law and your organization’s compliance obligations and Checklists: Antitrust compliance and Conducting an antitrust audit.

Section 1 – Overview of franchise arrangements

Franchising relates to a business practice where the franchising company licenses its business model, intellectual property (eg, logos, trademarks, and patents), and corporate goodwill for use by another company or individual. Using a franchise model allows a company (as franchisor) to expand more rapidly and without incurring all the expense of expansion. Franchising allows the parent company to pass most of these costs on to the persons or entities (franchisees) who license the business franchise rights. It provides a means to distribute the expense for new locations and operations among the franchisees without requiring the franchisor to sell ownership interests in its company.

Under a franchise arrangement the franchisor licenses the use of its business model and the use of its name, trademarks, and products or services to franchisees that open their own operations. As part of the arrangement, the franchisee pays a royalty to the franchisor for this use, and then is normally granted access to the franchisor’s distribution network from which it buys its products. As a result, the franchisor acts as the originator of the business idea as well as the supplier to the franchisees while the franchisee handles all day-to-day customer interactions.

1.1 Franchise law overview

The ongoing operations of franchise activities are subject to both federal and state regulations. This includes oversight by the Federal Trade Commission (FTC) and those regulatory authorities in states whose laws either mimic or intend to serve the same function as the FTC regulations. These rules and regulations include those that focus on antitrust violations.

1.1.1 Definition of franchising

In basic legal terms, a franchise involves a business owner granting a license to another business owner. The licensed business becomes a franchise and falls under the terms and regulation of the license agreement. Under the terms of the license, the franchisor allows the new business to use the intellectual property and material of the franchisor. The franchisee also receives basic business support from the franchisor in order to operate the business up to the standards of the brand. In exchange for all this, the franchisee generally pays a one-time fee for the licensing as well as an ongoing royalty to the franchisor.

The criteria for establishing a franchise are regulated by the FTC. Specifically, the FTC’s definition of a franchise requires that the elements as listed below are present.

• A franchisee is required to obtain the right to operate the business in association with the franchisor’s trademark and to distribute goods and services defined by the company’s trademark.
• The franchisor must maintain a certain degree of authority over the franchise’s method of operation.
• There must be a contracted payment arrangement between the franchisor and franchisee.

For a franchise to be legally binding, it must follow a set of federal and state rules and regulations including those listed below.

• The franchisor must provide a disclosure document, which discloses the 23 prescribed pieces of information the franchisee must be made aware of. This must be provided within 14 days. See further information below at 1.1.3.
• Franchisors cannot misrepresent or mislead a franchisee on money matters or financial performance.

Additional requirements for granting a franchise are included in the FTC Franchise Rule, 16 CFR Parts 436 and 437.

1.1.2 State laws

A franchise agreement is subject to various state laws as well. Some state laws have requirements that may be more stringent than federal stipulations, such as having a marketing plan.

State franchise laws are designed to protect residents of the state against unfair or deceptive practices by franchisors. Generally, the state where the franchisee resides or where the franchisee will operate the franchised business will be the state law that governs regulatory compliance.

Note that some states do not have laws specifically regulating franchise relationships. In Texas, for example, franchise agreements are exempt from registration as ‘business opportunities’ if the franchisor complies with all applicable federal regulations. Franchisors are required to register only their name and address with the secretary of state. See, Tex Bus & Com Code section 51.003.

1.1.3 FTC regulation

In the United States, the Federal Trade Commission has oversight of franchising. The FTC administrates oversight via the FTC Franchise Rule. The FTC Franchise Rule (the Franchise Rule) is a federal regulation which requires franchisors to prepare an extensive disclosure document and give a copy of this document to any prospective franchise purchaser prior to the offer or sale of any franchise. The disclosure document typically used to comply with the Franchise Rule is called a Franchise Disclosure Document (FDD).

The FDD must contain specific detailed information about the franchise’s operations including information about required fees, basic investment, bankruptcy and litigation history of the franchisor, how long the franchise will be in effect, a financial statement of the franchisor, and earnings claims.

The FTC utilizes the Franchise Rule and consumer educational resources to combat business- opportunity fraud. The Franchise Rule requires franchisors to make material disclosures in five categories:

• the nature of the franchisor and the franchise system;
• the franchisor’s financial viability;
• the costs involved in purchasing and operating a franchised outlet;
• the terms and conditions that govern the franchise relationship; and
• the names and addresses of current franchisees who can share their experiences within the franchise system, thus helping the prospective franchisee to verify independently the franchisor’s claims.

The Franchise Rule provides for exemptions for certain franchises; for example, it does not apply to a franchise in the following circumstances.

• The total of the required payments made by the franchisee any time from before the start of the operation to within six months after commencing operation of the franchisee’s business is less than $735. See, 16 CFR Section 436.8(a)(1).
• The franchise relationship is a fractional franchise (ie, the franchisee has more than two years of experience in the same type of business and it is anticipated that the sales arising from the relationship will not exceed 20% of the franchisee’s total dollar volume in sales during the first year of operation) or a leased department (in which a retailer permits a seller to conduct business from the retailer’s location but the seller purchases no goods, services, or commodities directly or indirectly from the retailer).
• The franchise relationship is covered by the Petroleum Marketing Practices Act, 15 USC section 2801 et seq.
• The franchisee’s initial investment, excluding any financing received from the franchisor or an affiliate and excluding the cost of unimproved land, totals at least $1,469,600 and the prospective franchisee signs an acknowledgment verifying the grounds for the exemption.
• The franchisee (or its parent or any affiliates) is an entity that has been in business for at least five years and has a net worth of at least $7,348,000.
• One or more purchasers of at least a 50% ownership interest in the franchise, within 60 days of the sale, has been, for at least two years, an officer, director, general partner, individual with management responsibility for the offer and sale of the franchisor’s franchises, or the administrator of the franchised network; or within 60 days of the sale, has been, for at least two years, an owner of at least a 25% interest in the franchisor.
• There is no written document that describes any material term or aspect of the relationship or arrangement.

The FTC has published a Franchise Rule Compliance Guide to help franchisors comply with the agency’s Franchise Rule, as amended. See 16 CFR Parts 436 and 437.

On July 12, 2024 the FTC released a statement titled ‘FTC Takes Action to Ensure Franchisees’ Complaints are Heard and to Protect Against Illegal Fees’. Included in this press release is the announcement that the FTC is issuing a new Policy Statement. In the conclusion to the Policy Statement, the FTC discusses concerns that it and many franchisees have concerning their ability to report potential law violations to the government. The FTC specifically states that franchise agreement clauses that prohibit a franchisee from reporting potential law violations to the government, or threats to sue or otherwise retaliate against a franchisee who reports violations are both considered unfair and unenforceable. There is speculation that the FTC is considering issuing a new or updated Franchise Rule in 2025.

Section 2 – Drafting franchise agreements

As with any contract, a franchise agreement is a written expression of the parties’ intentions in entering into the transaction. The overall intention of a franchise agreement is to create an intricate relationship with numerous 'moving parts'. Those 'parts' must be addressed with specificity in order to create a workable, mutually beneficial agreement.

2.1 Franchise agreements generally

As noted at section 1 above, franchise agreements generally relate to a business practice where the franchisor licenses its business model, intellectual property (eg, logos, trademarks, and patents), and corporate goodwill to the franchisee. The franchisee then operates a satellite facility and pays the franchisor for the use of those rights.

2.1.1 What they are

Franchise agreements are legal agreements where both parties confer certain legal rights and responsibilities to each other. The franchisor looks to secure protection for the trademark, and also seeks to control the business concept and secure the know-how of its business model. The franchisor must consider the legalities of its distribution and shipping models, the tax implications of its franchising system, and the contract terms to enforce its rights. In addition, the franchisor must also address the potential for liability that it may be exposed to because of the actions or inactions of its franchisees.

The franchisee is obligated to carry out the services for which the trademark has been made prominent or famous. The franchisor requires significant standardization, and generally enforces this through detailed contracts known as franchising agreements. Some examples of this standardization include the franchisee being required to display the franchisor’s signs, logos, and trademark prominently, adhere to dress code policies, and meet certain minimum customer service standards, etc. Should the franchisee breach the franchising agreement, it may result in termination of the right to use the franchisor’s model, name, and logos (effectively putting the franchisee out of business). In addition to these responsibilities, the franchisee must handle day-to-day employment issues, procurement of supplies not provided by the franchisor, health-code standards, and many others.

Note: a franchisor that fails to exercise adequate control over the use of its trademark could have the trademark cancelled. See FreecycleSunnyvale v Freecycle Network, 626 F3d 509 (9th Cir 2010).

2.1.2 State laws may impose required terms

At the state level there are various franchise registration, filing, disclosure, and relationship laws that are imposed on franchisors and that vary from state to state. States that require Franchise Disclosure Document (FDD) registration are known as the franchise registration states and, typically, impose the most stringent franchise laws and regulations.

Not all states have laws or regulations directly affecting franchising. In those states that do have relevant laws, the laws or regulations generally fall into one or more of the following categories:

• laws that require a franchisor to register the franchise before it offers or sells a franchise (franchise registration laws);
• laws that require a franchisor to provide certain information to prospective franchisees before they purchase a franchise (franchise disclosure laws);
• laws that regulate the legal relationship between the franchisor and franchisee (franchise relationship laws); and
• laws that require a franchisor to register to obtain an exemption under business opportunity laws that may otherwise affect franchising (business opportunity exemption registration laws).

2.2 Key drafting and contracting considerations

2.2.1 General considerations

Franchise agreements are contracts. While they are a specialized type of contract, and while they are subject to significant federal and state regulation as well as potential antitrust risks, they are still subject to the usual rules of contract interpretation.

For further information, see Checklist: What to consider to ensure a contract is valid and How-to guide: How to assess antitrust law risks in agency and distribution agreements.

Ambiguity

As in any contract, ambiguous terms in a franchise agreement will be construed against the drafter. The party drafting the contract – typically, the franchisor – must be certain to use precise language and include special definitions of terms as necessary.

Good faith and fair dealing

The FTC does monitor franchise agreements and activity to ensure good faith and fair dealing. In one such case that is listed in the FTC’s ‘Cases and Proceedings’, which details recent actions taken by the FTC, the FTC took action in March 2025 and was successful in having a federal court temporarily halt a business opportunity scheme known as Click Profit, which took millions from consumers by falsely promising consumers that they could earn big profits through online sales. In August 2025 the FTC announced a proposed settlement in click profit operators case,  under which the defendants will be permanently banned from the business-opportunity industry and must turn over cash, real estate, and personal property for consumer redress.

Most US jurisdictions recognize the duty to exercise good faith and fair dealing in a contract. In a few jurisdictions, a party’s performance under a contract may breach that duty even though that performance does not violate a pertinent express term of the contract. See eg, Wilson v Amerada Hess Corp, 168 NJ 236, 244, 773 A2d 1121, 1126 (2001).

Many states make good faith and fair dealing in franchise agreements a statutory requirement. See e.g., Minn Stat section 80C.14 (prohibiting engaging in conduct defined by the commissioner of commerce as ‘unfair and inequitable’ and see Minn R 2860.4400 for the current listing of unfair and inequitable practices).

2.2.2 Criteria for granting franchise

It is important to investigate the past conduct of the applicant franchisee, as well as the key executives and officials of the business enterprise that is seeking to become a franchisee. While there are numerous business or economic factors to consider, it is especially important to determine whether the applicant, or any business controlled or operated by them, has a history of civil or criminal legal violations. An individual applicant’s possible involvement in those violations should be scrutinized carefully. In addition, an applicant’s history of instituting litigation should be scrutinized. A history of bringing unsuccessful lawsuits, especially lawsuits dismissed as baseless or frivolous, may raise questions about the reliability of the proposed franchisee, and about their ability to work within a system.

2.2.3 FTC disclosure rule

As noted above at 1.1.3, the Franchise Rule is a federal regulation which requires franchisors to prepare an extensive disclosure document and give a copy of this document to any prospective franchise purchaser.

Franchisors must have a reasonable basis and substantiation for any Financial Performance Representations (FPRs) made to prospective franchisees, as well as disclose the basis and assumptions underlying any such FPRs. While FPRs are not required to be provided to prospective franchisees under the Franchise Rule, most franchisors do elect to provide some level of FPR disclosure.

2.2.4 Antitrust risk

Any agreement between two separate business entities that limits how either or both of those entities does business may raise antitrust concerns. Franchise agreements, which place restrictions on the business operations of both the franchisor and franchisee, are no exception.

Antitrust risk is dealt with in more detail in section 3 below.

2.2.5 Scope of agreement

The franchise agreement should be specific as to the geographic territory being assigned to the franchisee. In addition, franchise agreements are typically for a fixed and determinable time. While there may be provisions to extend or renew the agreement, one benefit of an expiration date is that an underperforming franchisee can be removed at the expiration date without the time and expense associated with an actual termination.

2.2.6 Exclusivity

To the extent that any rights are being granted exclusively to the franchisee, they should be detailed in the agreement. For example, a franchisor of fitness clubs may wish to limit personal training services to only one location in an area. The right to offer personal training should be stated explicitly in that franchisee’s agreement. Agreement with other franchisees should also state that they are not permitted to offer such services.

2.2.7 Pricing

The pricing policy for the products or services to be provided by the franchisor to the franchisee should be explicitly provided for in the agreement, taking into consideration the potential for price discrimination issues in which franchisees are charged different prices for the same products or services (see further below section 3.1.3). If prices may vary over the course of the agreement, that variability should be set out.

2.2.8 Relations with other franchisees

How the franchisees are permitted or restricted from interacting with each other should be provided for in the agreement. How they may collaborate (eg, joint advertising campaigns) and interact (eg, independent franchise associations) should be clear in the agreement.

Further, restrictions on non-competition and employee poaching must also be specifically provided for as well.

2.2.9 Conduct expectations

Expectations related to a franchisee’s business conduct should also be included in the agreement. These expectations should include time and payment of royalty fees, and use of the franchisor’s trademark, patent, trade secrets, and signage. The agreement should specify what constitutes compliance with the expectations from both a legal and business perspective.

2.2.10 Remedies

Generally, any well-crafted legal agreement should anticipate and provide for the circumstance where either party is unhappy with the arrangement, for whatever reason. The usual remedy for dissatisfaction by either party is termination, although an agreement may include a means for resolving a dispute short of termination (e.g., probation, or mediation of the issues). Within the context of a franchise agreement, these provisions should address potential legal fees and costs, indemnification, and involuntary termination. Also consider an arbitration clause.

2.2.11 Termination

Any termination or probation clause should be drafted with state laws limiting the right of franchisors to terminate a franchise in mind. State laws may only permit termination for cause, may impose notice and/or cure requirements before termination, or may provide other termination protections for the franchisee. For example, among other things, California law requires a franchisor to have good cause before terminating a franchise agreement. Cal. Bus. Prof. Code section 20020 - 20022, et. seq.

’Good cause’ is often defined as failure to comply with the lawful terms of the franchise agreement. Franchisees are usually allowed a period of time in which to cure their non-compliance. See eg, Haw Rev Stat 482E-6.

In many jurisdictions, no notice is required for termination for certain causes such as the repeated failure to follow the terms of the franchise agreement, bankruptcy of the franchisee, franchisee’s conviction of a crime related to the franchise, voluntary abandonment of the franchise, or if the franchisee engages in conduct which reflects materially and unfavourably upon the operation and reputation of the franchise business or system. See eg, Cal Bus & Prof Code 20021.

2.2.12 Post-termination

In the event of termination of the franchisee, if permissible under state law, language should be included in the franchise agreement that restricts the franchisee’s ability to subsequently compete directly with the franchisor in another venture. It is also advisable to include a prohibition against using the franchisor’s intellectual property (trademarks, business methods, formulas, or recipes) to protect the franchisor’s interest.

From an antitrust perspective, restrictions cannot be overly broad in scope (e.g., for an unlimited duration) and this should be considered when drafting and negotiating these non-compete clauses to avoid allegations of anti-competitive conduct. Additionally, be sure to review current state and federal laws related to non-compete provisions. California broadly prohibits the use of non-competes and will only enforce a franchise non-compete when and to the extent necessary to protect the franchisor’s proprietary information and trade secrets.

The FTC has demonstrated interest in further regulating non-competition agreements in the franchise context; however, has not taken any action in this area. The Commission rule that prohibits non-compete agreements for employees states that the rule applies only to ‘a natural person who works for the franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.’

Section 3 – Antitrust risk in franchise agreements

Franchise agreements pose risks that the agreement will violate federal or state antitrust laws. It is essential that the practitioner be aware of these risks when drafting and performing a franchise agreement.

3.1 Antitrust law basics

The federal government and many individual states have enacted antitrust laws to protect and promote competition in the marketplace.

3.1.1 Federal legislation

There are three principal federal antitrust laws in the United States:

• the Sherman Antitrust Act of 1890 (15 USC section 1, et seq);
• the Clayton Antitrust Act of 1914 (15 USC section 12, et seq; 29 USC sections 52-53); and
• the Federal Trade Commission Act of 1914 (15 USC section 41, et seq).

The Sherman Act outlaws contracts, conspiracies, or combinations that attempt to restrain trade, and imposes both civil and criminal penalties. The Clayton Antitrust Act amended the Sherman Act to add additional activities that were uncovered after the Sherman Antitrust Act was passed and that should have been considered prohibited. The Federal Trade Commission Act then outlawed unfair methods of competition and unfair acts or practices that affect illegal commerce as well as providing protection for consumers.

For additional information see How-to guide: Understanding antitrust and unfair trade practices law and your organization’s compliance obligations and Checklist: Antitrust compliance.

3.1.2 State laws

In addition to federal laws, there are also state antitrust laws that, while conceptually similar to federal law, may vary significantly from state to state. For example, while some state antitrust laws substantially track the language of their federal counterparts, other states may only incorporate select sections of federal antitrust laws. Other states may impose additional requirements, such as making certain conduct a per se violation of state laws although the same conduct is not a per se violation of federal law.

3.1.3 Areas of antitrust concern for franchises

While antitrust law is very broad and complex, there are several key areas of particular antitrust concern within the context of franchise business operations. Note that many of these provisions will not violate antitrust law if they do not inhibit or limit competition.

Vertical restraints

Vertical antitrust issues arise in the context of relationships between businesses at different levels in the chain of distribution. Vertical price-fixing arrangements include agreements by manufacturers or distributors to set minimum or maximum resale (i.e., retail) prices for their products. For example, a hotel franchisor may require its franchisees to charge a certain base price for accommodations.

Vertical price-fixing may be considered colluding between the franchisor and franchisee to establish a specified resale price instead of allowing the free market to guide franchisees in determining prices through supply and demand. In terms of franchisors who may wish to endorse and sponsor price promotions (e.g., ‘All tacos at all Juan’s Comida Fantástica locations only $.75 to celebrate Cinco de Mayo’), an issue may arise when it appears that the company is possibly participating in such antitrust violations by promoting price collusion. In this example, the problem here may be avoided by saying that the promotion is valid at ‘all participating Juan’s Comida Fantástica locations’ because it appears that some locations may choose to opt out of the promotion.

Non-price distribution restraints

Non-price vertical restraints include exclusive distribution agreements. In exclusive distribution cases, the manufacturer commits itself to a single retailer to be its sole (or primary) outlet in a particular geographic area. An example would be a franchise agreement that says a franchisee will be a company’s only retail outlet in a state. Exclusive distributorships can be pro-competitive and, therefore, permissible, when competing manufacturers that sell to other retailers also are present in the market. In that situation, consumers are not limited to one choice for a product or service.

Exclusive dealing and exclusive distribution arrangements may be anticompetitive, however, if they are used to raise rivals’ costs (eg, by restricting where a rival may buy necessary supplies), exclude (or foreclose) competition, or facilitate tacit collusion. For example, if ABC Purchasing Club obtained the exclusive rights to be the sole distributor of Alpha, Beta, and Gamma televisions, such exclusivity could have an anticompetitive effect on other retailers since other retailers are foreclosed from carrying these brands of television sets. Exclusive distributorships may be pro-competitive and normally are permissible, especially if there are competing manufacturers that are selling through other retailers present in the market.

For more discussion on exclusive distribution agreements, please see How-to guide: How to assess antitrust law risks in agency and distribution agreements.

Purchasing restraints

Exclusive purchasing restraints are another example of non-price vertical restraints. In exclusive purchasing cases, a franchisor requires that its franchisees purchase goods or materials only from the franchisor. Exclusive purchase agreements may be regarded as anticompetitive if the supplier from whom purchases must be made has a near monopoly position in the market. In the franchise context, however, exclusive purchasing restraints may be a means of quality control, by ensuring the uniformity of the goods or services provided. A restraint may be justified if there is such an enumerated purpose in the agreement. For example, a restaurant franchisor may require franchisees to purchase ingredients, especially pre-prepared ingredients, from the franchisor or its chosen distributor. Such a restriction is properly considered an effort to protect the franchisor’s intellectual property (i.e., its trademarks and goodwill) by ensuring the uniformity of its product.

Customer and territorial allocations

These may be variously referred to as the geographical, protected, or exclusive area in the franchise agreement. For example, the agreement may grant special rights to a franchisee within a certain radius of their location.

Territorial allocations for franchisees are not per se unlawful but are analyzed under the so-called ‘rule of reason.’ The allocation will not be deemed unlawful unless the effect of the allocation is an unreasonable restraint of trade.

Resale price maintenance

Resale price maintenance agreements or (RPMs) are arrangements where resellers agree that they will sell products at certain prices at or above price floor (minimum RPM) or at or below a price ceiling (maximum RPM). At the federal level these agreements are evaluated using the rule of reason. See Leegin Creative Leather Products, Inc v PSKS, Inc, 551 US 877 (2007). However, because many states have their own antitrust laws this type of price-fixing may be viewed as a per se violation. If the franchisor intends to grant franchises in a state that follows such a rule, the agreement should be clear that the franchisor will make only suggestions or recommendations as to pricing, and that franchisees are free to set their own prices.

Horizontal restrictions

Horizontal restrictions may be viewed as an example of collusion. This may include requiring franchisees to agree to set prices, production quantities, or even discounts at certain levels.

Tie-ins and tying

In US law, tie-in agreements are essentially exclusive dealing requirements. That is, the franchisor requires the franchisee to purchase their goods or materials from either the franchisor or a designated supplier.

Price discrimination

Price discrimination involves charging different prices to different buyers. For example, supplies may be provided to one franchisee at a lower price than one or more others. If the franchisor can show a good reason for a price differential (eg, it costs more to ship a particular item to a certain geographic area), the discrimination will not be unlawful.

Independent franchisee associations

An independent franchisee association is an organization of various franchisees usually within one franchise system. Restricting the ability of a franchisee to form or participate in these associations may be regarded as anticompetitive.

Joint advertising by franchisees

Joint advertising by franchisees may pose an issue if the franchisees are using joint advertising as a means of colluding on prices.

‘No poaching’ agreements

Anti-poaching provisions bar franchisees from poaching employees of another franchisee, especially when substantial time and expense has been incurred to train the employee regarding the franchisor’s specialized skills and methods.

The US Department of Justice has recently taken the position that anti-poaching agreements between competitors are per se unlawful antitrust violations. The DOJ has not, however, taken a position on anti-poaching agreements between franchisees of the same franchisor.

3.2 Antitrust risk analysis

Assessing the potential risk of franchise agreements should be led by the person or persons designated as the antitrust compliance officer. This may be, or may include involvement with, outside legal counsel. The risk assessment should also include all key internal stakeholders within the organization.

For additional information see How-to guide: How to identify and manage antitrust and unfair trade practice law risk.

Assessing the potential risk of franchise agreements should include a review of all existing agreements and should also be a part of the creation of any new agreements.

The risk assessment should include an evaluation as to whether, considering all factors, an agreement constitutes an unreasonable restraint on competition. This analysis, referred to as the rule of reason, takes into consideration factors such as specific details about the business at issue, market conditions, and the arrangement’s history, nature, and economic impact, as well as any pro-competitive justifications. Also, the rule of reason considers whether there is a less restrictive alternative to the restraint.

One theory that may be explored as part of the antitrust risk analysis is that of the single economic enterprise. A single economic enterprise generally comprises distinct legal entities jointly contributing to a single economic enterprise. The constituent parts of a single economic enterprise do not pose antitrust issues, because a single enterprise cannot conspire with itself. The test for whether an agreement creates a single economic enterprise is whether the agreement joins separate economic actors pursuing separate economic interests so as to deprive the marketplace of independent centers of decision-making, and therefore of diversity of entrepreneurial interests and of actual or potential competition.

Franchise systems could be regarded as single economic enterprises. Many of the operational decisions in franchise systems are made by the franchisor. Those that are not, are generally subject to the franchisor’s approval, or must be made within certain limitations set by the franchisor. Franchisees may or may not be construed as being separate economic actors pursuing separate economic interests. While franchisors and the franchisees have common interests in promoting the brand they operate under, franchise outlets are separately owned and may be in competition with one another for customers.

At least one court has held that a particular franchise agreement created a single economic enterprise for the purposes of antitrust law. See, Arrington v Burger King Worldwide, Inc, 448 F Supp 3d 1322 (SD Fla 2020). The holding in that case related specifically to a part of the franchise agreement that dictated certain employment practices, and held that, at least in the context of that part of the agreement, Burger King and its franchisee were not separate entities and so could not have ‘colluded’ to place those employment restrictions in the contract. The Court’s holding was the result of a fact-specific inquiry into the particular contract at issue, and while that may limit its precedential effect, the Court’s reasoning should be kept in mind when drafting an agreement.

3.3 Risk mitigation

Risk mitigation requires, first, an understanding of antitrust rules and regulations. Then, applying those principles to the franchise agreements and business practices of both the franchisor and the franchisees. Finally, where areas of concern are identified the company must take corrective action to either mitigate that risk or eliminate it entirely wherever possible.

3.3.1 Generally

By coordinating the efforts of all key internal stakeholders during the review and creation process for drafting and negotiating franchise agreements, each stakeholder has an opportunity to provide input on mitigating potential risk factors.

Optimally, a standardized template for a franchise agreement should be created that would limit modifications for each use. In the event that circumstances require any modification, input and approval should be sought from each of the key stakeholders.

3.3.2 Evaluation of risk

In evaluating risk in a franchise agreement, many factors should be considered. Included in this evaluation should be what the state of the relevant market is, and the status of the current regulatory environment. 

Additional resources

Related Lexology Pro content

How-to guides:

How to terminate a sales representative agreement
How to assess antitrust law risks in agency and distribution agreements
How to build a culture of antitrust law compliance
How to draft an antitrust-unfair trade practices compliance program
How to identify and manage antitrust and unfair trade practice risk
Understanding antitrust and unfair competition law and your organization’s compliance obligations

Checklists:

Appointing a local distributor
Appointing a local sales or marketing agent
Drafting an agency agreement
Termination of a distributorship agreement
Antitrust compliance
Conducting an antitrust audit

Clauses:

Intellectual property
Pricing
Remedies
Termination
Non-compete provisions

Reliance on information posted:

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