Mobility-Restricting Covenants in Business Contracts: The Case of Franchising

Abstract

Several studies show that restrictive covenants in employment contracts, such as non-compete agreements, may affect employees in detrimental ways, including by reducing mobility and suppressing wages. While such concerns are real, these clauses also have the potential to serve legitimate business purposes by helping companies protect valuable information, which can encourage investment and training and enhance social welfare. This paper explores the use of several types of covenants, including non-competes but also confidentiality and post-relationship non-recruitment clauses, in franchise contracts, an important and accessible category of business contracts. Many of these contracts impose restrictive covenants on franchisees but also on other individuals, notably franchisees' business partners and family members, and in some cases, their managers and employees. Patterns in the use of these covenants across these individuals are telling, suggesting that in business contracts, the information-protection role of such clauses may be important.