Franchise businesses operate in a rapidly shifting legal environment. Whether you are a franchisor preparing to expand into new markets or a franchisee evaluating your next investment, several trends deserve your attention heading into 2027.

Heightened Scrutiny of Franchise Disclosures

The Federal Trade Commission (“FTC”) continues to press for greater transparency in the franchise sales process. Under the FTC's Franchise Rule, franchisors must furnish prospective franchisees with a Franchise Disclosure Document (“FDD”)—a detailed package of approximately 23 items covering everything from pending litigation to fee structures. Increasingly, regulators are scrutinizing whether all required fees are disclosed upfront, particularly where additional charges surface only in post-sale operations manuals rather than in the FDD itself. The FTC has also raised concerns about confidentiality and non-disparagement clauses that may discourage franchisees from communicating with federal regulators.

State-Level Non-Compete Restrictions Are Expanding

While a broad federal non-compete ban issued by the FTC (which made an exception for franchise relationships and agreements) was ultimately set aside, state legislatures have moved to fill the gap. Virginia enacted a law, effective July 1, 2026, prohibiting post-termination non-competes in new franchise agreements. Tennessee passed legislation establishing that non-compete periods of three years or less are presumptively reasonable in the franchise context. California's evolving restrictions on employment non-competes may also spill over into franchise agreements, and the state is imposing new registration and vetting requirements on franchise brokers. Franchisors must now conduct a state-by-state analysis before including or omitting restrictive covenants and when determining their scope.

Courts Are Raising the Bar for Franchisor Injunctions

Franchisors seeking preliminary injunctions to halt trademark infringement or non-compete violations can no longer rely on historical judicial deference. Courts increasingly require franchisors to present concrete evidence of irreparable harm and likelihood of success on the merits, rather than presuming harm from the breach itself. The practical takeaway: franchisors should build a strong evidentiary record before filing a motion for a preliminary injunction.

The Joint-Employer Balancing Act

Franchisors must protect their brand and enforce system standards without crossing into day-to-day control of a franchisee's operations, particularly hiring and personnel decisions, or risk being classified as a joint employer. This has always been a balancing act for franchisors, but in recent years, the legal standard has shifted with successive presidential administrations, making this an area that requires ongoing vigilance.

Is Your Business Arrangement Actually a Franchise?

Many businesses are surprised to learn that a trademark license, supply agreement, branded distribution arrangement, or other operating relationship may legally constitute a franchise, regardless of what the parties call it. Under the FTC Franchise Rule, an arrangement generally is a franchise when it includes three elements: the right to use a trademark, payment of a required fee, and significant control over or assistance with the method of operation. State-law tests may differ, so an agreement that avoids franchise status under federal law may still trigger state requirements. 

The line can be especially difficult to draw when legitimate trademark quality-control provisions expand into broader operational requirements. Misclassification can expose an accidental franchisor to disclosure and registration violations, regulatory enforcement, civil penalties, rescission claims, fraud, or deceptive practices claims, and, under some state laws, potential personal liability for officers, directors, or advisers. Businesses that desire a particular arrangement not be deemed a franchise should evaluate the proposed relationship before a formal agreement is finalized and executed and draft the contract narrowly enough to preserve necessary brand standards without assuming unnecessary control over the counterparty’s operations. 

Territorial Rights Require Precision 

Territorial exclusivity and encroachment remain recurring sources of conflict between franchisors and franchisees. Franchisees should understand the size and scope of their protected territory, while franchisors should clearly reserve any rights they desire to retain in such territory, including, for example, the right to operate or license locations in airports, stadiums, and other nontraditional venues, or to sell branded products through retail, e-commerce, or other channels. Clear drafting can reduce disputes over whether those activities improperly compete with a franchisee’s local operations and breach the territorial provision in the franchise agreement. 

Blank Rome's Franchise and Distribution group counsels franchisors and franchisees alike on FDD compliance, state registration, non-compete strategy, territorial rights, intellectual property issues, and franchise litigation nationwide.

For more information or assistance, contact Charles S. Marion, or another member of Blank Rome’s Franchise and Distribution team.