Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / Why Franchisees Are Fighting Noncompete Clauses in 2026
Transcript
- Lucas: So let's start with a number: roughly eighty percent of franchise agreements still include some form of noncompete clause that restricts where a former franchisee can work or open a business after they sell or leave. Luna: And that number hasn't budged much despite all the legal noise around noncompetes the past few years. Lucas: Right. The FTC's 2024 rule that would have banned most noncompetes nationwide got struck down by a federal judge in Texas before it even took effect. But the conversation didn't die. If anything, franchisees have gotten more aggressive about challenging these clauses in court. Luna: And we've got a great case to anchor this. Tell me about the Firehouse Subs franchisee in Florida. Lucas: Yeah, this is from late 2025. A guy named Mark Delgado owned two Firehouse Subs locations in the Tampa area for about seven years. He sold both stores back to the brand in 2024 as part of a corporate refranchising push. Standard sale—he got paid, he signed a release. But the original franchise agreement had a two-year, three-mile noncompete. After the sale, he wanted to open an independent sub shop about two miles from his old location. Luna: And Firehouse Subs said no—or tried to. Lucas: They sent a cease and desist. Delgado sued, arguing the noncompete was unenforceable because he didn't voluntarily leave—he sold at the brand's request. The court agreed. The judge ruled the noncompete wasn't tied to any legitimate business interest after the sale, since Delgado was no longer a franchisee and had no access to trade secrets. Luna: So the key wasn't that noncompetes are dead—it's that they're harder to enforce when the franchisee exits at the brand's invitation. Lucas: Exactly. And that's becoming a pattern. We're seeing franchisees challenge noncompetes more often in three scenarios: when the brand buys them out, when the territory shrinks mid-contract, or when the franchisee is terminated without cause. Courts are starting to ask: what exactly is the brand protecting here? Luna: And the answer is often 'market allocation'—which sounds a lot like what antitrust law frowns on. Lucas: Bingo. A noncompete that prevents a former franchisee from opening any sandwich shop within three miles is basically a market division agreement. The FTC's now-defunct rule drew exactly that connection. Even without the rule, judges are citing that reasoning. In 2025, a Michigan court voided a noncompete for a former Jimmy John's franchisee, saying the clause was 'overbroad and anti-competitive.' Luna: Jimmy John's is actually a fascinating case study here. They had that famously aggressive noncompete—five miles, three years—that got challenged years ago. Lucas: Right, the 2016 Illinois settlement. Jimmy John's agreed to stop enforcing noncompetes against low-wage workers after the state AG sued. But what's less known is that they quietly revised their franchisee noncompetes too. They shortened the radius to two miles and the duration to one year. That was a direct response to litigation risk. Luna: So the industry is already self-correcting in places—but unevenly. Lucas: Very unevenly. Some brands are doubling down. I talked to a franchise attorney who told me about a QSR brand that just increased its noncompete from two years to three in its 2026 standard agreement. Their argument? They invest heavily in site selection and training, so they deserve protection. But franchisees are pushing back during negotiations. Luna: And that's the real story for anyone buying a franchise today. The noncompete clause is no longer boilerplate you just sign. Lucas: Exactly. Ten years ago, most buyers skimmed it. Now it's a top-three negotiation point. Franchisees are asking: what happens if I want to sell? What if the brand terminates me? What if I want to open a different concept in the same strip mall? And they're getting concessions—shorter durations, narrower geographies, or exceptions for selling to the brand. Luna: Let's talk about state law variance, because that's huge. California and Minnesota already ban post-employment noncompetes outright. Oklahoma and North Dakota have narrow exceptions. But what about franchise-specific rules? Lucas: A handful of states have franchise relationship laws that touch on noncompetes indirectly. For example, Iowa and Wisconsin require that any post-termination noncompete be 'reasonable' and tied to a legitimate business interest. But there's no federal standard. So a franchisee in California can basically ignore a noncompete, while one in Texas has to take it seriously. Luna: Which creates this weird geographic lottery for franchisees. Lucas: It does. And brands are responding by including choice-of-law provisions that pick a franchisee-friendly state. I saw one agreement that said all disputes would be governed by Florida law—even for a franchisee in Oregon—because Florida's courts have historically upheld noncompetes. Luna: That feels like a red flag for a buyer. If the contract says the laws of a state you don't live in will apply, that's something to question. Lucas: Absolutely. Any franchise disclosure document—the FDD—will list the governing law. If it's not your home state, ask why. And ask for a waiver of that clause. We're seeing more franchisees get that concession. Luna: What about the brand's perspective? I mean, some noncompete protection makes sense. They invest in the training, the brand, the real estate. Lucas: Sure, and courts agree—to a point. A six-month, one-mile noncompete is usually enforceable. A three-year, ten-mile one isn't. The problem is many brands write the most aggressive version possible and then negotiate down. That's strategic, but it creates friction. And in a tight franchisee recruitment market, that friction loses deals. Luna: We're seeing some brands proactively reduce their noncompetes as a selling point. I noticed that The Joint Chiropractic, the franchise chain, markets itself as having 'no post-term noncompete' in its franchise disclosure. That's a deliberate differentiator. Lucas: And it's smart. Because the kind of franchisee they want—experienced multi-unit operators—are exactly the people who care about exit flexibility. If you're building a portfolio of clinics, you don't want to be locked out of a market because you sold one location. Luna: Let's bring it back to the Delgado case for a second. He won, but it cost him. Legal fees, time, stress. He told a local paper he spent about $40,000 on the lawsuit. Lucas: And he only won because the facts were in his favor—the brand asked him to sell. If he'd voluntarily sold to a third party, the outcome might have been different. So the lesson isn't that noncompetes are toothless. It's that the enforcement landscape is shifting, and franchisees have more leverage than they think—if they're willing to fight. Luna: Which brings up the practical question: what should someone buying a franchise do today? Lucas: First, read the noncompete clause in Item 12 of the FDD. It's usually in the 'Territory' section, but sometimes hidden in the general provisions. Second, ask the brand for examples of how they've enforced it. Have they sued former franchisees? Settled? How many? Third, negotiate. Ask for a shorter duration, a smaller radius, or an exception if the brand terminates you without cause. And get it in writing as an amendment to the franchise agreement. Luna: And if the brand refuses to budge, that's information too. Lucas: It is. It tells you something about their relationship philosophy. Some brands see franchisees as long-term partners. Others see them as temporary operators. The noncompete clause is a good litmus test for which camp they're in. Luna: This is the kind of conversation that makes me think about how much this show—and others like it—helps people navigate these decisions. If these conversations have moved your work forward in some small way, a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making episodes like this one. Lucas: Yeah, it's a small group, but it keeps the show ad-free and independent. So thank you to those who do. And back to noncompetes—one last thing I want to flag is the renewal trap. Some franchise agreements have a noncompete that applies even if you simply choose not to renew. So you run a location for ten years, you decide not to sign a new agreement, and suddenly you can't open a similar business anywhere nearby. Luna: That's brutal. And it's exactly the kind of clause that's being challenged more in 2026. Lucas: Right. A case in Pennsylvania last year involved a franchisee of a cleaning service who didn't renew after 12 years. The brand tried to enforce a two-year noncompete. The court said no—because the franchisee had built the business independently, and the brand's goodwill was minimal after a decade. That case is on appeal, but it signals that even renewal noncompetes aren't automatic. Luna: So the trend is clearly toward more scrutiny. What do you see happening in the next 12 months? Lucas: I think we'll see more state-level legislation. A few states are considering bills that specifically limit noncompetes in franchise agreements—New York, Illinois, Colorado. And I wouldn't be surprised if the FTC tries again, maybe with a narrower rule focused on low-wage workers and franchisees. Politically, noncompete reform has bipartisan appeal. Luna: Low-wage worker noncompetes are already banned in several states. Franchisees often don't fit that category, but the logic of protecting economic mobility applies. Lucas: Exactly. And the more franchisees share their stories—like Mark Delgado—the more momentum builds. For now, the message is: don't assume the noncompete is unchangeable. Read it, question it, and negotiate. The worst they can say is no. Luna: And if they say no, you've learned something valuable before you sign. Lucas: Exactly. That's the takeaway.