Two attorneys from Kaufman & Canoles, Nicole Harrell and Savannah Kimble, attended the annual International Franchise Association’s Legal Symposium in Washington, D.C. from May 5-7, 2024.

The International Franchise Association (IFA) recently announced its core practices of responsible franchising and policy recommendations. The principles are grounded in transparency during the franchise sales process through improved pre-sale disclosures. Through working groups comprised of franchisors, franchisees and suppliers, the IFA has developed five key principles and best practices:

1. Setting clear goals and expectations during the pre-sale process
2. Connecting prospective franchisees with the right franchise opportunity
3. Ensuring the franchisors and franchisees commit to their respective obligations
4. Focusing collectively on driving unit economics and profitability for all parties
5. Embracing collaboration between franchisors and franchisees

The IFA is encouraging policymakers to support and adopt the recommendations. As these principles seek to improve the franchising relationship through improved disclosures, it is certainly possible that we could see proposed changes to the Federal Trade Commission’s (FTC) Franchise Rule at some point in the future.

FTC Bans Noncompetes

The FTC has released a final rule which would ban noncompetes between employers and workers nationwide. This means that, unless courts prevent the rule from taking effect, on September 4, 2024, noncompetes between franchisors and franchisees and their workers will no longer be enforceable and no new noncompetes will be permitted. Both franchisors and franchisees will be required to provide notice to their respective workers bound by a noncompete that the franchisor or franchisee will not be enforcing the noncompete. Additionally, if a franchisor’s franchise documents require franchisees to obtain noncompetes from the franchisee’s workers, that requirement must be eliminated from the Franchise Disclosure Document and Franchise Agreement. Noncompetes between a franchisor and franchisee will still be permitted, as will noncompetes between a franchisor or franchisee and senior executives who (a) earn more than $151,164 annually and (b) who are in policy-making positions.

Lawsuits attempting to prevent the rule from taking effect have been filed, and the rule may be stayed while the issue is before the courts. Implementation is uncertain at this time.

Artificial Intelligence and Franchising

At the Symposium, artificial intelligence (AI) was a hot topic. Key takeaways from the AI panel, entitled “Use of Artificial Intelligence in Franchising and Associated Legal Issues,” included:

1. How to implement AI into a franchise system, including new clauses in the franchise agreement to permit a franchisor’s use of AI.
2. Data privacy and security concerns originating from customer input of personal information, which franchise systems using AI will have a duty to monitor and control.
3. Marketing and intellectual property concerns. Franchisors who do not have an in-house marketing team should ask their marketing vendors whether they use AI. Because the ownership status of AI-created intellectual property is currently unsettled, marketing teams may not be able to assign rights in AI-created marketing materials to franchisors. Additionally, franchisors should make clear to marketing teams using AI that the franchisor’s intellectual property, including trademarks and logos, should not be used as inputs into an AI system.
4. The potential for franchisors and franchisees to utilize AI in mundane processing tasks, such as customer service and supply chain management.
5. Because of inherent bias in AI, franchisors should consider that it may not always be accurate.