In this bonus episode of FranchiseU!, Kathy speaks with Michael Gray about the recent ruling by the Federal Trade Commission that bans non-compete contracts and the potential impact on franchises and employees.
Mr. Gray serves as a Commercial Litigation attorney at Lathrop GPM. His 38 years' experience representing franchisors throughout the United States provides him a unique understanding of the new FTC rule.
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(00:00):
The Federal Trade Commissionjust issued a new ruling.
Focused on non-compete, andthere are two parts to that.
Non-competes for workers andnon-compete on the franchise side.
They've been clumped together,however, in this special edition of
Franchise U. Join me as Mike Gray, apartner at Lathrop, GPM unpacks, what
this means in the franchise world.
(00:26):
Welcome to the Franchisee podcast,where key industry leaders
provide education and inspiration.
Here's your host, Dr. Kathy Gosser,the director of the Yum Center
for Global Franchise Excellenceat the University of Louisville,
and welcome to a special edition ofFranchise U, and this one is going
(00:47):
to be very interesting with me today.
I have Mike Gray, who is a partner.
At Lathrop, GPM Hey, welcome Mike.
We're so glad you're here.
Thank you.
Thank you for having me.
Uh, we're gonna talk aboutsomething really fantastic.
Let's talk about you first.
So you are a partner at theFranchise Law Firm, Lathrop, GPM.
So you graduated from theUniversity of Wisconsin.
(01:07):
I think I've said before.
I'm an IU grad, so go Big 10.
And then you earned a lawdegree at Hamline University.
You were the lead litigation counsel forseveral national franchise companies,
and so you have lots of experience infranchise litigation as well as this
special area of non-compete enforcement.
So Mike, you've been atLathrop for 23 years.
Tell us about how you foundyour way to franchise law.
(01:31):
We, it precedes that I've been practicingfranchise law for about 38 years.
Wow.
I started, when I was in lawschool, I worked for a locker
firm in Minneapolis as a clerk.
That firm happened to do a number ofthings, but franchise law was one of them.
And I started working with partnersthat practiced it and then when
I graduated, they hired me.
So I never actually had a resume.
(01:52):
I just went right to that firmand then that firm merged twice.
Um, and then I left the third firmand went to, was great play at Moody
back in 2001 and that two years ago.
Oh gosh, now it's three yearsago and we merged with Lathrop G
outta Kansas City and now we'rerelated to GPM in the entire time.
(02:12):
I've practiced this franchise lawmostly, um, almost exclusively
litigation in the franchise space.
I do other types of commerciallitigation, but the majority
of it is franchise related.
You must really enjoy that tospend that many years in it.
Yeah.
What is it about franchise lawthat's so intriguing to you?
Well, I like it because itinvolves a, a number of layers.
(02:35):
There's federal law that applies tofranchising and also trademarking,
which trademarks and ip.
I do a lot of that.
Then there's also state laws that applyin approximately 14, 15 states have
their own state franchise laws, whichare all different, and then each case.
Seems to always have different facts.
(02:56):
There are some similar claims or types ofclaims, but the underlying factual basis
for those claims is always different.
It's always unique and you're dealingwith different people and, and I
just found that, uh, the variety andthe complexity of it at times it was
intriguing and was attractive to me.
I can definitely understand andappreciate what you're saying.
(03:19):
All of my years working with franchisees,there was never a day that was the same.
So, and it's, it's also interesting, somuch of it comes down to relationships
and you mentioned the state laws andof course those are relationship laws
that are different in franchisingand so that is a fascinating part.
Before we move on to our topic, can youtell us maybe about an interesting case,
no names, but an interesting franchisecase that you've had in past years.
(03:43):
I could talk about a type of case.
That's good.
That's good.
Alright.
Um, the enforcement of the non-competeagainst nons signatories, those cases I've
probably had 20 or 25 of them or more.
Um, always are very interestingbecause franchisees spend a good
amount of energy and creativity intrying to avoid their non-compete
(04:07):
agreement at, at the end of the term,either expiration or termination.
And it, it invariably in thosesituations where they want to
continue operating either at the samelocation or in the same territory.
Inevitably, the franchise business,the clients, the, the customers,
the, the, the ip et cetera, end upeither in, in the name of the wife
(04:30):
or son or a cousin relative or.
A good friend or a manager,and then they try to inform
them that they can't do that.
You can't just do indirectly, which youcan't do directly, and you always get
the, well, they didn't sign the franchiseagreement, so they're not bound by it.
And, and that's not exactly truewhy they may not be bound by
(04:54):
the language of the agreement.
Um, they can't conspire withthe franchisee to evade the
non-compete for that purpose.
And the courts.
Have been fairly consistent in, inruling that not only is the franchisee
bound, but all those persons, as thecourt would say, an active concert or
participation with the franchisee can't.
(05:16):
Do that.
So a, a new corporate entity thatthey form or a corporate entity that
their wife forms or so, or cousin,uh, they're all, they can't do what
the franchisee can't do directly.
And those cases are always factually veryintense because each one's different, uh,
what they did and, and how they did it.
(05:36):
To try to avoid the non-compete is, isfactually different and if you, you have
to dig into the facts in those cases,really to find out what has happened
and lay it out for the court and so thatthe judge can understand that this is
just a continuation of the same businessunder different leadership, which
violates the intent of the non-compete.
(05:58):
Which is to allow the F to have anotherfranchisee move into that territory or for
another franchisee by the territory or thestore and location, whatever, and continue
under the franchisor's mark to preservethe will on a going forward basis.
So I've had a number of thosecases, some reported, and they
are always fast paced 'cause yougotta go in and get an injunction.
(06:21):
So things happen.
Yeah.
So it's very compressedand just interesting work.
I've enjoyed those cases probably themost in, in terms of franchise litigation.
I can see that.
So are you talking about, just toclarify, are you talking about,
say, I have a, a chicken restaurantbrand, we'll just say that.
Say I have a chicken restaurant brand andI decide not to renew my contract, but
(06:44):
I wanna go ahead and in that same spacestill have another chicken restaurant.
Is that what you're talking about?
Yes.
Yes.
Okay.
Excellent.
That's what I thought it was,because I can see where that
could get dicey for sure.
Oh, that is interesting.
That is fascinating.
Which leads us to, so you've actuallygiven us a beautiful segue for this, Mike.
So the FTC just issued a new rulingjust last week on non-compete
(07:07):
agreements, basically prohibitingnon-compete covenants, which they
state prohibits competition, includinglike new business development.
But it's basically for folksthat work at companies.
Understand though, it's for senior levelexecutives are not included in that,
and it's about 150,000 is the salary.
That's how they determine it.
So basically it means if I am working ata brand and I've signed in non-compete,
(07:31):
I can't go work at a similar brand.
And, and usually companies will layout what the, what companies those are.
But they now have said that they feelthat restricts someone's income level.
It restricts new ideas, itrestricts new companies, et cetera.
So they have struck that down and there'sthis new ruling, but they carved out the
franchise model as well as executives.
So that's what we'd like to talk about.
(07:53):
So first of all, you couldprobably explain it a lot
more eloquently than I can.
Can you talk a littlebit about the FTC ruling?
Provide a summary on that?
Yeah, there's really two aspects to it.
The employment side and then thefranchise side, which from, from my
perspective, that this is personal, I,I think was a mistake on the FTCs part.
To investigate and issue arule on bo on those together.
(08:18):
Mm-hmm.
There are very differentrelationships and involve different
contracts, different concepts didifferent protectable interests.
So I was disappointed that theydecided to lump them together for
purposes of the comment period andgetting input from people because
they're really very different issues.
(08:38):
They did get over 26,000 comments, butin the actual commentary with the ruling,
they acknowledged that the vast majorityof those was on the employment side.
And I think what happened is variousassociations and coalitions got their
members all to submit a comment.
It was online.
It's very easy to do, and, and it, ittakes all of two minutes, so mm-hmm.
(09:03):
A lot of people did that.
Then there were other organizations,individuals and companies that
had a more substantive comments.
Our firm submitted, I think asix or seven page letter on the
franchise side of things, becausethat's what our interest was.
But when they came out with therule that the differentiation is in
the definition of a worker mm-hmm.
(09:25):
That they said, uh, worker is what youwould expect for an employee, someone that
works for someone else that does work.
But it excludes.
Worker does not include the context ofthe franchisor franchisee relationship.
So that's how they excluded it,which is a little clunky, but
that's how they decided to do it.
(09:46):
So you've got employees or employers thathave had their contracts, essentially
that portion of their employmentcontracts, the non-compete agreement, um.
It, it just wiped off the,the books 120 days after.
Mm-hmm.
Uh, the rule is filed, finallypublished, but on the franchise side,
(10:07):
it does not affect the non-competein the franchise agreements.
However, franchisors and franchiseesboth have employees, right?
So the employment side applies to themin that context, but it doesn't really
change the non-compete environment orlandscape in the franchise relationship.
(10:27):
You've now got a situationwhere franchisors have to
look at it on two levels.
Their franchise agreement probablywon't change, but their employment
agreements with their senior executives,which separate category or just their
employees, how are they going to protectthe information that those employees
(10:48):
have gained during the time that they'vebeen employees, and potentially taking
that and going to a competitor and using.
Inside information orknowledge as a competitor.
And that's what all employers are doingnow, is trying to figure out how can
we protect ourselves if these, uh,non-compete grievance are not enforceable?
(11:10):
And that is gonna differ widelydepending on the nature of your business.
For example, a medical tech company.
They've got knowledge of customersand pricing technology and so forth,
and that they're gonna have to protectthat information differently than a
franchisor who employs a, you know, anarea developer that has knowledge about
(11:31):
how to sell franchises effectively.
What brokers or what strategies workbest And they're very different, uh,
bits of protective information thatthey're gonna have to try to find a
way to protect and that can be done.
Through various, like non-solicitationclauses, treat secret restrictions, and
there's other ways of trying to protectthat information, but they're gonna
(11:55):
have to look at their contracts, takeout the non-compete, and try to bolster
the other protections as best they can.
Um, I, I know what the otherside says in respect to that
argument, not ka beats have beenoutlawed in California for years.
They seem to make it work there,and that's not an unfair argument to
make, but I think it's gonna be newfor everyone else in the country.
(12:18):
I think that's such agreat summation of that.
Thanks for that, Mike.
You know, when you think about workingfor a franchisor, so I put myself
back in my shoes of my days at atYum Brands and to think about the
employees not having, I guess thenon-compete didn't matter anyway.
They probably didn't sign anon-compete at the individual.
(12:38):
The individual units, but I never thoughtabout what stops someone from taking.
A recipe secret to another brand.
There's not a lot there.
Now.
That's a trait thatshould be a trade secret.
Yeah.
I mean, if it's, if it's been adequatelyprotected, restricted access, if
you can satisfy the trade secretdefinition, you know, those things
can be protected, that kind of thing.
(13:00):
Recipes and formulas and so forth.
It's basically, it's the knowledgethat really is hard to protect.
You can't unlearn what you know, andthat's always the tension and the
argument when you try to, to enforcethat is the courts generally say, look,
you can't restrict the person from usingwhat they know, uh, to in another job.
(13:21):
Uh, if it's protectable information,fine, then you gotta define that.
You gotta separate it out, and yougotta have restrictions on that.
But that's hard to do.
It's a fine line, so,
mm-hmm.
Yeah,
so these comments are so interestingbecause I did read there were 26,000.
So it's interesting to hear you saythat the majority of those folks
focused on the worker, but when thosecomments are sent into the FTC, some
(13:44):
folks maybe me might think, oh, they'reprobably not gonna read those, but.
I think they must.
So what is that process?
Um, if you talk aboutthat, that's interesting.
Uh, I, I, I'm not sure
I can take a guess.
I've got other interactionswith the FTC in other contexts.
They do have an enormous amount ofstaffers, and I think that they do
(14:05):
go through them and probably put themin buckets and then maybe pull out
some that are more substantive or.
By issue.
And then I think people up the food chain,so to speak, will be a, a subset of those.
But I think they do go through them alland put them in, you know, employee for
(14:25):
employee against franchise or against.
And then if there's good subsetof content in the analysis, I
think they pull those separate.
Look at those a littlecloser, at least I hope so.
We spends a lot of time on our comments.
Sounds like you spent a lot of timeand you know, that makes sense to
definitely, first of all look at thenumbers and then to do a random sample.
But to your point, the ones that aren'tjust, I disagree with this, or I agree,
(14:47):
but that really do provide some goodinformation that can be read and analyzed.
That makes a lot of sense.
So we talked about.
The issue of how do you ensure privateinformation is kept confidential?
And you talked a little bit aboutthe levers that are available.
Would you mind talking a bit more on that?
Well, I'm not sure if there's moreto cover, I guess in the context
(15:08):
of, of the employment relationship.
Again, I think it really dependson the nature of your business,
of what you're trying to protect.
Um, Coca-Cola.
That's a trade secret, the formula.
Mm-hmm.
I would suspect that many restaurants,KFC, for example, and others have
proprietary blends that are protectedand those would be trade secrets.
(15:29):
Then of course you can go in andget damages or injunctive relief
preventing 'em from using that.
If it's a customer centric, let'stake franchise for, for example,
on maids, uh, would be a big onebecause you've got a customer listing.
People that you clean ona recurring basis usually.
And that customer list is really,encompasses a large value of the business
(15:53):
because those ongoing repeat businessgoodwill is, is really the value of
the business in a made leaves andtakes the customer list, starts another
business and solicits those customers.
That's a problem for the franchisor.
So usually the franchise agreements say.
That the, the franchisor owns thecustomer list, but then the franchisee
(16:17):
would normally have an agreementwith the made as well saying you
can't solicit customers, you can'ttake the customer list, you can't
use it after you leave employment.
And those are generally enforceable.
What, what we're gonna see thoughis arguments that non-solicitation
really is a masked non-compete, right?
(16:38):
If you enforce that, that's essentially.
Saying that you can't compete withus, which, okay, I get that argument,
but the counter argument is youcan go to another city 10 miles
away and start your own business.
Staying in the territory you in andsoliciting the customers that you work
for and preventing you from doing thatdoesn't prevent you from working as a made
(16:59):
for another franchisor for that matter.
Mm-hmm.
You just can't take ourcustomers and sell us code.
And I think the courts would enforce that.
So again, it's the natureof the franchise that.
It is gonna determine how thosecontracts are gonna be modified to try
to protect their business interests.
100%. Because you're right people,especially once you have a maid service,
(17:20):
it's typically the person that comesto your home is who you have the
relationship with, not the company,
right?
So that's what makes a differenceversus if you're going to a retail
establishment, it totally is different.
So you are right.
It would depend upon thenature of the actual franchise.
I can def definitely see that.
Excuse me.
The two counter arguments on thatthough would be, you know, I have
(17:41):
the relationship with a customer andthe franchisor would say, but you
started that relationship because wegave you the customer's name, right.
And they saw our nationallyrecognized trademark and trusted
you to come in and do that.
So both sides havearguments on that point.
Yeah.
And that's what a franchise does for you.
It's that brand reputation,name recognition, and obviously
(18:01):
the process that's followed.
So, so that makes all thedifference in the world.
I can see that.
Well, I can remember when we wouldhave people leave and go to work, or
a competitor because they were a lowerlevel, didn't have a non-compete, and our
franchisees would get so upset about that.
So put yourself in theshoes of a franchisee.
What do you think thisruling means to them?
What do you, what do you thinkthey're thinking about it?
(18:24):
Again, it's unlikely that thefranchisee is going to have.
Senior executives that qualifyThat's right, earn 50 rate.
Now, some of the large multi-unitfranchisees that have area managers
or regional managers that manage anumber of stores, they certainly could
get up into that category, but thevast majority are going to be under.
(18:49):
The senior executive economicthreshold, and they're just not
gonna have non comme with 'em.
They're going to be able to go wherethey want, which this whole thing
started with Jimmy John's in that case,and the non-solicitation and so forth.
So it, it's also been a movement acrossthe country and Minnesota just enact
a statute that, with some exceptions,says not, can be too longer enforceable.
(19:11):
And that's the trend A across the country.
So good luck, bucket net trend, but yougotta go to the legislature to do it.
I hear you.
Do you think many companies eventried to litigate or hold to those
non-competes for junior members?
For example, say pest control companies,they're notorious for having non-competes
because they're worried about theircustomer list exactly as you've defined.
(19:32):
So do you think they manyhave really held to that?
It really depends on when theyleave and whatever they do.
Yeah.
With petition, are theyhurting our business?
There you go.
If, if they're taking.
Customers, more customers than youcan tolerate in normal attrition.
Yeah.
They at least send a letter andthreaten or maybe actually do it.
(19:54):
But I've had franchise wars that havehad franchisees in a very remote area
where there are few other franchiseesand they weren't doing much business.
And they've just said, look,as a business decision.
There's, we're gonna let thishappen because there's no other
franchisees around to protect.
We're really not interested in goingback into that market, and it's
(20:15):
just not economically worth it.
Spending the money to, and, andyou're gonna be faced with the
argument, who are you protecting?
There's no other franchiseewithin, you know, a hundred
miles, whatever it might be.
That's true.
It, each case has to beweighed on its actual merits.
Totally makes sense.
So what do you think thefuture of all of this is?
(20:35):
Well, I, I wasn't gonna leaveyou without saying that.
I, I don't know that the, uh, FTC ruleis actually ever gonna come into effect.
The Chamber of Commerce is, has filedI think, at least one, one lawsuit.
There are multiple lawsuits I think,that are in the works that are going to
try to stop it for a number of reasons.
If you read the dissenting opinion,uh, of Commissioner Wilson, either,
(20:57):
I think it was either in the first orsecond opinion, she voted against it
and said, this is beyond our powers.
It we, this is a congressional thing.
Congress needs to enact a law.
The FTC doesn't enact laws.
They issue rules.
And most of those rules areconsumer protection based, like
labeling on labels and advertisingissues and things like that.
(21:21):
And they cite that as authorityfor their rulemaking authority.
But this is basically sayingall these millions of contracts
across the country are now gone.
And that's not something I.Unelected commissioners who are
really not accountable to thepublic in terms of being voted out.
(21:42):
It's beyond their power.
And so I think they'revulnerable in that sense.
And much like the joint employerruling, a judge in Texas is probably
gonna say, I'm sorry, we're strikingthis down because you've exceeded
your authority and your powers.
So I've told our clients, sit tight.
See what happens.
(22:03):
Don't take any drastic measures.
Certainly start thinking abouthow you might revise your
contracts at the employmentlevel to protect your interests.
But let's see where this goes, becauseI think it, it may be vulnerable,
uh, in that sense, and it may not,at least in the near term, uh,
ever actually come into effect.
Excellent perspective.
(22:24):
Thank you.
I'll ask you one lastquestion before I let you go.
So you have so muchknowledge in franchise law.
I don't know that I've met anyone thathas 38 years in franchise law, but if
you were a student right now, we havea lot of them studying franchising.
What do you think is the mostimportant thing for them to know
about franchise law in general?
I, I guess I would say, um,get a firm understanding of the
(22:48):
statutory and legal landscape.
Both at, at the federal level, the FTCrule disclosure issues, and then at the
state level, specifically focusing onsome of the states that have a more robust
relationship like California, Wisconsin.
Because many times I've seen peopledo things or take actions that
(23:11):
conflict with existing law becausethey didn't know the law was there.
And there's a, there'ssome good textbooks.
The A BA published a franchise textbook.
A number of years ago that wasbeen written by practitioners all
over the country, which would beprobably is the textbook they would
use if they took a franchise class.
But if they haven't, I wouldget that book and read it.
(23:32):
That would give you a headstartthought in the industry.
'cause there's a lot to learn, uh,so that you don't make mistakes.
There is a lot to learn,especially in the legal landscape.
There's a ton to learn.
Mike, thank you so much for your time.
It's been wonderful talking aboutthis non-compete and I learned a lot.
So thank you.
Great.
My pleasure speaking with you.
Franchise you franchisee wasbrought to you by the Yum Center
(23:54):
for Global Franchise Excellenceat the University of Louisville.
For more information on the centervisit business Louisville Ed.
Slash Yum.
CGFE.
Thank you for listening to franchise You.
The Federal Trade Commissionjust issued a new ruling.
Focused on non-compete, andthere are two parts to that.
Non-competes for workers andnon-compete on the franchise side.
They've been clumped together,however, in this special edition of
Franchise U. Join me as Mike Gray, apartner at Lathrop, GPM unpacks, what
this means in the franchise world.
(00:26):
Welcome to the Franchisee podcast,where key industry leaders
provide education and inspiration.
Here's your host, Dr. Kathy Gosser,the director of the Yum Center
for Global Franchise Excellenceat the University of Louisville,
and welcome to a special edition ofFranchise U, and this one is going
(00:47):
to be very interesting with me today.
I have Mike Gray, who is a partner.
At Lathrop, GPM Hey, welcome Mike.
We're so glad you're here.
Thank you.
Thank you for having me.
Uh, we're gonna talk aboutsomething really fantastic.
Let's talk about you first.
So you are a partner at theFranchise Law Firm, Lathrop, GPM.
So you graduated from theUniversity of Wisconsin.
(01:07):
I think I've said before.
I'm an IU grad, so go Big 10.
And then you earned a lawdegree at Hamline University.
You were the lead litigation counsel forseveral national franchise companies,
and so you have lots of experience infranchise litigation as well as this
special area of non-compete enforcement.
So Mike, you've been atLathrop for 23 years.
Tell us about how you foundyour way to franchise law.
(01:31):
We, it precedes that I've been practicingfranchise law for about 38 years.
Wow.
I started, when I was in lawschool, I worked for a locker
firm in Minneapolis as a clerk.
That firm happened to do a number ofthings, but franchise law was one of them.
And I started working with partnersthat practiced it and then when
I graduated, they hired me.
So I never actually had a resume.
(01:52):
I just went right to that firmand then that firm merged twice.
Um, and then I left the third firmand went to, was great play at Moody
back in 2001 and that two years ago.
Oh gosh, now it's three yearsago and we merged with Lathrop G
outta Kansas City and now we'rerelated to GPM in the entire time.
(02:12):
I've practiced this franchise lawmostly, um, almost exclusively
litigation in the franchise space.
I do other types of commerciallitigation, but the majority
of it is franchise related.
You must really enjoy that tospend that many years in it.
Yeah.
What is it about franchise lawthat's so intriguing to you?
Well, I like it because itinvolves a, a number of layers.
(02:35):
There's federal law that applies tofranchising and also trademarking,
which trademarks and ip.
I do a lot of that.
Then there's also state laws that applyin approximately 14, 15 states have
their own state franchise laws, whichare all different, and then each case.
Seems to always have different facts.
(02:56):
There are some similar claims or types ofclaims, but the underlying factual basis
for those claims is always different.
It's always unique and you're dealingwith different people and, and I
just found that, uh, the variety andthe complexity of it at times it was
intriguing and was attractive to me.
I can definitely understand andappreciate what you're saying.
(03:19):
All of my years working with franchisees,there was never a day that was the same.
So, and it's, it's also interesting, somuch of it comes down to relationships
and you mentioned the state laws andof course those are relationship laws
that are different in franchisingand so that is a fascinating part.
Before we move on to our topic, can youtell us maybe about an interesting case,
no names, but an interesting franchisecase that you've had in past years.
(03:43):
I could talk about a type of case.
That's good.
That's good.
Alright.
Um, the enforcement of the non-competeagainst nons signatories, those cases I've
probably had 20 or 25 of them or more.
Um, always are very interestingbecause franchisees spend a good
amount of energy and creativity intrying to avoid their non-compete
(04:07):
agreement at, at the end of the term,either expiration or termination.
And it, it invariably in thosesituations where they want to
continue operating either at the samelocation or in the same territory.
Inevitably, the franchise business,the clients, the, the customers,
the, the, the ip et cetera, end upeither in, in the name of the wife
(04:30):
or son or a cousin relative or.
A good friend or a manager,and then they try to inform
them that they can't do that.
You can't just do indirectly, which youcan't do directly, and you always get
the, well, they didn't sign the franchiseagreement, so they're not bound by it.
And, and that's not exactly truewhy they may not be bound by
(04:54):
the language of the agreement.
Um, they can't conspire withthe franchisee to evade the
non-compete for that purpose.
And the courts.
Have been fairly consistent in, inruling that not only is the franchisee
bound, but all those persons, as thecourt would say, an active concert or
participation with the franchisee can't.
(05:16):
Do that.
So a, a new corporate entity thatthey form or a corporate entity that
their wife forms or so, or cousin,uh, they're all, they can't do what
the franchisee can't do directly.
And those cases are always factually veryintense because each one's different, uh,
what they did and, and how they did it.
(05:36):
To try to avoid the non-compete is, isfactually different and if you, you have
to dig into the facts in those cases,really to find out what has happened
and lay it out for the court and so thatthe judge can understand that this is
just a continuation of the same businessunder different leadership, which
violates the intent of the non-compete.
(05:58):
Which is to allow the F to have anotherfranchisee move into that territory or for
another franchisee by the territory or thestore and location, whatever, and continue
under the franchisor's mark to preservethe will on a going forward basis.
So I've had a number of thosecases, some reported, and they
are always fast paced 'cause yougotta go in and get an injunction.
(06:21):
So things happen.
Yeah.
So it's very compressedand just interesting work.
I've enjoyed those cases probably themost in, in terms of franchise litigation.
I can see that.
So are you talking about, just toclarify, are you talking about,
say, I have a, a chicken restaurantbrand, we'll just say that.
Say I have a chicken restaurant brand andI decide not to renew my contract, but
(06:44):
I wanna go ahead and in that same spacestill have another chicken restaurant.
Is that what you're talking about?
Yes.
Yes.
Okay.
Excellent.
That's what I thought it was,because I can see where that
could get dicey for sure.
Oh, that is interesting.
That is fascinating.
Which leads us to, so you've actuallygiven us a beautiful segue for this, Mike.
So the FTC just issued a new rulingjust last week on non-compete
(07:07):
agreements, basically prohibitingnon-compete covenants, which they
state prohibits competition, includinglike new business development.
But it's basically for folksthat work at companies.
Understand though, it's for senior levelexecutives are not included in that,
and it's about 150,000 is the salary.
That's how they determine it.
So basically it means if I am working ata brand and I've signed in non-compete,
(07:31):
I can't go work at a similar brand.
And, and usually companies will layout what the, what companies those are.
But they now have said that they feelthat restricts someone's income level.
It restricts new ideas, itrestricts new companies, et cetera.
So they have struck that down and there'sthis new ruling, but they carved out the
franchise model as well as executives.
So that's what we'd like to talk about.
(07:53):
So first of all, you couldprobably explain it a lot
more eloquently than I can.
Can you talk a littlebit about the FTC ruling?
Provide a summary on that?
Yeah, there's really two aspects to it.
The employment side and then thefranchise side, which from, from my
perspective, that this is personal, I,I think was a mistake on the FTCs part.
To investigate and issue arule on bo on those together.
(08:18):
Mm-hmm.
There are very differentrelationships and involve different
contracts, different concepts didifferent protectable interests.
So I was disappointed that theydecided to lump them together for
purposes of the comment period andgetting input from people because
they're really very different issues.
(08:38):
They did get over 26,000 comments, butin the actual commentary with the ruling,
they acknowledged that the vast majorityof those was on the employment side.
And I think what happened is variousassociations and coalitions got their
members all to submit a comment.
It was online.
It's very easy to do, and, and it, ittakes all of two minutes, so mm-hmm.
(09:03):
A lot of people did that.
Then there were other organizations,individuals and companies that
had a more substantive comments.
Our firm submitted, I think asix or seven page letter on the
franchise side of things, becausethat's what our interest was.
But when they came out with therule that the differentiation is in
the definition of a worker mm-hmm.
(09:25):
That they said, uh, worker is what youwould expect for an employee, someone that
works for someone else that does work.
But it excludes.
Worker does not include the context ofthe franchisor franchisee relationship.
So that's how they excluded it,which is a little clunky, but
that's how they decided to do it.
(09:46):
So you've got employees or employers thathave had their contracts, essentially
that portion of their employmentcontracts, the non-compete agreement, um.
It, it just wiped off the,the books 120 days after.
Mm-hmm.
Uh, the rule is filed, finallypublished, but on the franchise side,
(10:07):
it does not affect the non-competein the franchise agreements.
However, franchisors and franchiseesboth have employees, right?
So the employment side applies to themin that context, but it doesn't really
change the non-compete environment orlandscape in the franchise relationship.
(10:27):
You've now got a situationwhere franchisors have to
look at it on two levels.
Their franchise agreement probablywon't change, but their employment
agreements with their senior executives,which separate category or just their
employees, how are they going to protectthe information that those employees
(10:48):
have gained during the time that they'vebeen employees, and potentially taking
that and going to a competitor and using.
Inside information orknowledge as a competitor.
And that's what all employers are doingnow, is trying to figure out how can
we protect ourselves if these, uh,non-compete grievance are not enforceable?
(11:10):
And that is gonna differ widelydepending on the nature of your business.
For example, a medical tech company.
They've got knowledge of customersand pricing technology and so forth,
and that they're gonna have to protectthat information differently than a
franchisor who employs a, you know, anarea developer that has knowledge about
(11:31):
how to sell franchises effectively.
What brokers or what strategies workbest And they're very different, uh,
bits of protective information thatthey're gonna have to try to find a
way to protect and that can be done.
Through various, like non-solicitationclauses, treat secret restrictions, and
there's other ways of trying to protectthat information, but they're gonna
(11:55):
have to look at their contracts, takeout the non-compete, and try to bolster
the other protections as best they can.
Um, I, I know what the otherside says in respect to that
argument, not ka beats have beenoutlawed in California for years.
They seem to make it work there,and that's not an unfair argument to
make, but I think it's gonna be newfor everyone else in the country.
(12:18):
I think that's such agreat summation of that.
Thanks for that, Mike.
You know, when you think about workingfor a franchisor, so I put myself
back in my shoes of my days at atYum Brands and to think about the
employees not having, I guess thenon-compete didn't matter anyway.
They probably didn't sign anon-compete at the individual.
(12:38):
The individual units, but I never thoughtabout what stops someone from taking.
A recipe secret to another brand.
There's not a lot there.
Now.
That's a trait thatshould be a trade secret.
Yeah.
I mean, if it's, if it's been adequatelyprotected, restricted access, if
you can satisfy the trade secretdefinition, you know, those things
can be protected, that kind of thing.
(13:00):
Recipes and formulas and so forth.
It's basically, it's the knowledgethat really is hard to protect.
You can't unlearn what you know, andthat's always the tension and the
argument when you try to, to enforcethat is the courts generally say, look,
you can't restrict the person from usingwhat they know, uh, to in another job.
(13:21):
Uh, if it's protectable information,fine, then you gotta define that.
You gotta separate it out, and yougotta have restrictions on that.
But that's hard to do.
It's a fine line, so,
mm-hmm.
Yeah,
so these comments are so interestingbecause I did read there were 26,000.
So it's interesting to hear you saythat the majority of those folks
focused on the worker, but when thosecomments are sent into the FTC, some
(13:44):
folks maybe me might think, oh, they'reprobably not gonna read those, but.
I think they must.
So what is that process?
Um, if you talk aboutthat, that's interesting.
Uh, I, I, I'm not sure
I can take a guess.
I've got other interactionswith the FTC in other contexts.
They do have an enormous amount ofstaffers, and I think that they do
(14:05):
go through them and probably put themin buckets and then maybe pull out
some that are more substantive or.
By issue.
And then I think people up the food chain,so to speak, will be a, a subset of those.
But I think they do go through them alland put them in, you know, employee for
(14:25):
employee against franchise or against.
And then if there's good subsetof content in the analysis, I
think they pull those separate.
Look at those a littlecloser, at least I hope so.
We spends a lot of time on our comments.
Sounds like you spent a lot of timeand you know, that makes sense to
definitely, first of all look at thenumbers and then to do a random sample.
But to your point, the ones that aren'tjust, I disagree with this, or I agree,
(14:47):
but that really do provide some goodinformation that can be read and analyzed.
That makes a lot of sense.
So we talked about.
The issue of how do you ensure privateinformation is kept confidential?
And you talked a little bit aboutthe levers that are available.
Would you mind talking a bit more on that?
Well, I'm not sure if there's moreto cover, I guess in the context
(15:08):
of, of the employment relationship.
Again, I think it really dependson the nature of your business,
of what you're trying to protect.
Um, Coca-Cola.
That's a trade secret, the formula.
Mm-hmm.
I would suspect that many restaurants,KFC, for example, and others have
proprietary blends that are protectedand those would be trade secrets.
(15:29):
Then of course you can go in andget damages or injunctive relief
preventing 'em from using that.
If it's a customer centric, let'stake franchise for, for example,
on maids, uh, would be a big onebecause you've got a customer listing.
People that you clean ona recurring basis usually.
And that customer list is really,encompasses a large value of the business
(15:53):
because those ongoing repeat businessgoodwill is, is really the value of
the business in a made leaves andtakes the customer list, starts another
business and solicits those customers.
That's a problem for the franchisor.
So usually the franchise agreements say.
That the, the franchisor owns thecustomer list, but then the franchisee
(16:17):
would normally have an agreementwith the made as well saying you
can't solicit customers, you can'ttake the customer list, you can't
use it after you leave employment.
And those are generally enforceable.
What, what we're gonna see thoughis arguments that non-solicitation
really is a masked non-compete, right?
(16:38):
If you enforce that, that's essentially.
Saying that you can't compete withus, which, okay, I get that argument,
but the counter argument is youcan go to another city 10 miles
away and start your own business.
Staying in the territory you in andsoliciting the customers that you work
for and preventing you from doing thatdoesn't prevent you from working as a made
(16:59):
for another franchisor for that matter.
Mm-hmm.
You just can't take ourcustomers and sell us code.
And I think the courts would enforce that.
So again, it's the natureof the franchise that.
It is gonna determine how thosecontracts are gonna be modified to try
to protect their business interests.
100%. Because you're right people,especially once you have a maid service,
(17:20):
it's typically the person that comesto your home is who you have the
relationship with, not the company,
right?
So that's what makes a differenceversus if you're going to a retail
establishment, it totally is different.
So you are right.
It would depend upon thenature of the actual franchise.
I can def definitely see that.
Excuse me.
The two counter arguments on thatthough would be, you know, I have
(17:41):
the relationship with a customer andthe franchisor would say, but you
started that relationship because wegave you the customer's name, right.
And they saw our nationallyrecognized trademark and trusted
you to come in and do that.
So both sides havearguments on that point.
Yeah.
And that's what a franchise does for you.
It's that brand reputation,name recognition, and obviously
(18:01):
the process that's followed.
So, so that makes all thedifference in the world.
I can see that.
Well, I can remember when we wouldhave people leave and go to work, or
a competitor because they were a lowerlevel, didn't have a non-compete, and our
franchisees would get so upset about that.
So put yourself in theshoes of a franchisee.
What do you think thisruling means to them?
What do you, what do you thinkthey're thinking about it?
(18:24):
Again, it's unlikely that thefranchisee is going to have.
Senior executives that qualifyThat's right, earn 50 rate.
Now, some of the large multi-unitfranchisees that have area managers
or regional managers that manage anumber of stores, they certainly could
get up into that category, but thevast majority are going to be under.
(18:49):
The senior executive economicthreshold, and they're just not
gonna have non comme with 'em.
They're going to be able to go wherethey want, which this whole thing
started with Jimmy John's in that case,and the non-solicitation and so forth.
So it, it's also been a movement acrossthe country and Minnesota just enact
a statute that, with some exceptions,says not, can be too longer enforceable.
(19:11):
And that's the trend A across the country.
So good luck, bucket net trend, but yougotta go to the legislature to do it.
I hear you.
Do you think many companies eventried to litigate or hold to those
non-competes for junior members?
For example, say pest control companies,they're notorious for having non-competes
because they're worried about theircustomer list exactly as you've defined.
(19:32):
So do you think they manyhave really held to that?
It really depends on when theyleave and whatever they do.
Yeah.
With petition, are theyhurting our business?
There you go.
If, if they're taking.
Customers, more customers than youcan tolerate in normal attrition.
Yeah.
They at least send a letter andthreaten or maybe actually do it.
(19:54):
But I've had franchise wars that havehad franchisees in a very remote area
where there are few other franchiseesand they weren't doing much business.
And they've just said, look,as a business decision.
There's, we're gonna let thishappen because there's no other
franchisees around to protect.
We're really not interested in goingback into that market, and it's
(20:15):
just not economically worth it.
Spending the money to, and, andyou're gonna be faced with the
argument, who are you protecting?
There's no other franchiseewithin, you know, a hundred
miles, whatever it might be.
That's true.
It, each case has to beweighed on its actual merits.
Totally makes sense.
So what do you think thefuture of all of this is?
(20:35):
Well, I, I wasn't gonna leaveyou without saying that.
I, I don't know that the, uh, FTC ruleis actually ever gonna come into effect.
The Chamber of Commerce is, has filedI think, at least one, one lawsuit.
There are multiple lawsuits I think,that are in the works that are going to
try to stop it for a number of reasons.
If you read the dissenting opinion,uh, of Commissioner Wilson, either,
(20:57):
I think it was either in the first orsecond opinion, she voted against it
and said, this is beyond our powers.
It we, this is a congressional thing.
Congress needs to enact a law.
The FTC doesn't enact laws.
They issue rules.
And most of those rules areconsumer protection based, like
labeling on labels and advertisingissues and things like that.
(21:21):
And they cite that as authorityfor their rulemaking authority.
But this is basically sayingall these millions of contracts
across the country are now gone.
And that's not something I.Unelected commissioners who are
really not accountable to thepublic in terms of being voted out.
(21:42):
It's beyond their power.
And so I think they'revulnerable in that sense.
And much like the joint employerruling, a judge in Texas is probably
gonna say, I'm sorry, we're strikingthis down because you've exceeded
your authority and your powers.
So I've told our clients, sit tight.
See what happens.
(22:03):
Don't take any drastic measures.
Certainly start thinking abouthow you might revise your
contracts at the employmentlevel to protect your interests.
But let's see where this goes, becauseI think it, it may be vulnerable,
uh, in that sense, and it may not,at least in the near term, uh,
ever actually come into effect.
Excellent perspective.
(22:24):
Thank you.
I'll ask you one lastquestion before I let you go.
So you have so muchknowledge in franchise law.
I don't know that I've met anyone thathas 38 years in franchise law, but if
you were a student right now, we havea lot of them studying franchising.
What do you think is the mostimportant thing for them to know
about franchise law in general?
I, I guess I would say, um,get a firm understanding of the
(22:48):
statutory and legal landscape.
Both at, at the federal level, the FTCrule disclosure issues, and then at the
state level, specifically focusing onsome of the states that have a more robust
relationship like California, Wisconsin.
Because many times I've seen peopledo things or take actions that
(23:11):
conflict with existing law becausethey didn't know the law was there.
And there's a, there'ssome good textbooks.
The A BA published a franchise textbook.
A number of years ago that wasbeen written by practitioners all
over the country, which would beprobably is the textbook they would
use if they took a franchise class.
But if they haven't, I wouldget that book and read it.
(23:32):
That would give you a headstartthought in the industry.
'cause there's a lot to learn, uh,so that you don't make mistakes.
There is a lot to learn,especially in the legal landscape.
There's a ton to learn.
Mike, thank you so much for your time.
It's been wonderful talking aboutthis non-compete and I learned a lot.
So thank you.
Great.
My pleasure speaking with you.
Franchise you franchisee wasbrought to you by the Yum Center
(23:54):
for Global Franchise Excellenceat the University of Louisville.
For more information on the centervisit business Louisville Ed.
Slash Yum.
CGFE.
Thank you for listening to franchise You.
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