Franchise Noncompete and the NASAA Advisory: Reasonableness Standard and Industry Impact

Franchise lawyers William W. Sentell and Ryan Cangarlu warn that a new advisory from the North American Securities Administrators Association could muddy long-settled doctrine on franchise noncompetes, with real consequences for growth across the sector. In an American Bar Association article published Oct. 13, 2025, they argue that NASAA’s February guidance borrows the language of labor policy and applies it to a business-to-business license, risking confusion in registration reviews and in the courts.

The authors note that most recent reforms target worker mobility and employment noncompetes. Franchise covenants are different. They are designed to protect trademarks, confidential methods and local goodwill that reverts to the franchisor when an agreement ends. Courts have long policed those restraints under the familiar reasonableness test, tailoring months and miles to what is necessary to reestablish a location and prevent copycat operations.

NASAA’s advisory urges examiners to scrutinize scope, territory and duration, but it frames the issue as safeguarding a former franchisee’s “livelihood,” a rationale drawn from employment law. Because many registration states follow NASAA’s lead, Sentell and Cangarlu say examiners are already pressing for across-the-board cuts — for example, six-month or single-digit-mile limits — even where statutes do not authorize dictating contract terms. That informal pressure can operate like rulemaking, narrowing restraints before any facts are developed and before a judge can blue-pencil an overreach.

The industry-level risk is uncertainty. Enforceable post-term covenants give franchisors confidence to share playbooks, software and marketing that make the model work. They also reassure multi-unit operators and private equity investors that system equity will not be diluted by an immediate rebrand next door after a termination. If protection becomes unpredictable at the registration desk, capital gets priced higher or deployed elsewhere, unit transfers get harder and some brands tilt toward company-owned growth, higher royalties or shorter terms to offset risk.

The authors propose staying the course: Keep the reasonableness standard but apply it with franchise-specific markers. Ask what the franchisee actually received, how long a relaunch reasonably takes and what radius captures the real trade area. Trim overbroad bans on “any competing restaurant” or “all desserts,” but preserve tailored restraints that protect licensed goodwill and the successor franchisee’s ramp-up window.

The bottom line for franchising is not a call for blanket bans or blanket approvals. It is a plea for calibrated, case-by-case judgments that reflect how brands compete in the real world. Regulators can flag abuses, the article says, but courts — not registration examiners — are best positioned to balance mobility with the protection that keeps franchise systems investable.