New Virginia Law Bans Non-Competes in Franchise Agreements
On April 13, Gov. Abigail Spanberger signed House Bill 69 and its companion Senate Bill 240 into law. The new legislation takes effect on July 1 and makes two major changes to the Virginia Retail Franchising Act. The Act applies to any franchise “the performance of which contemplates or requires the franchisee to establish or maintain a place of business within the Commonwealth of Virginia.”
Virginia Law Will Govern Franchise Agreements
One amendment adds a new choice-of-law requirement, which states:
“Any franchise contract or agreement offered or entered into pursuant to the terms of this chapter shall be governed by the laws of the Commonwealth.”
This is a significant development for franchise systems that have historically designated the law of another state—often the franchisor’s home state—as the governing law in their franchise agreements. Absent state regulations to the contrary, franchisors generally require the application of a single state’s law across their systems to maintain consistency in contract interpretation and in the franchisor-franchisee relationship.
That practice will no longer be permissible for franchises located in Virginia. For any franchise agreement entered into on or after July 1 that provides for the franchisee maintaining a place of business in Virginia, Virginia law will now govern the relationship.
Virginia Bans Post-Termination Non-Compete Provisions
The most consequential amendment makes it unlawful for any person who offers or sells a franchise in Virginia, directly or indirectly:
“To offer or enter into a franchise agreement that restricts the right of a franchisee to engage in the business of offering, selling, or distributing goods or services at retail after termination or expiration of the franchise agreement.”
The prohibition covers restrictions triggered by both termination and expiration of the franchise agreement. For franchise agreements signed on or after July 1, Virginia law will prohibit provisions that forbid former franchisees from operating a competing business after the franchise relationship ends, whether the relationship concludes through termination or expiration.
The new law includes one important carve-out. If a franchisee voluntarily sells the franchise to a third party or back to the franchisor, the sale transaction may include a non-compete restricting the selling franchisee from engaging in a competing business for a period of no more than two years after the sale.
However, the exception is narrow, applying only when there is a voluntary sale at a mutually agreed-upon price and does not extend to franchisor-initiated terminations, non-renewals, or expirations where no sale occurs. Franchisors should also note the two-year cap, which may be shorter than the non-compete duration in some existing franchise agreements. California law recognizes a similar exception to its own ban on non-compete agreements.
Importantly, the legislation expressly provides that “nothing in this act shall be construed to alter, modify, or impair any contract entered into, extended, or amended prior to July 1, 2026.”
This grandfathering provision protects franchise agreements already in place before the effective date. However, franchisors should pay close attention to the words “extended” and “amended”—any extension, amendment, or renewal of an existing franchise agreement on or after July 1 could bring the entire agreement within the scope of the new law. Franchisors should map out upcoming renewal and amendment timelines for Virginia franchisees and plan accordingly.
Guidance For Franchisors
On April 14, the Division of Securities and Retail Franchising issued guidance for franchisors with registrations in Virginia extending beyond July 1, currently updating their franchise disclosure documents and franchise agreements. Franchisors can either:
- Defer amendments until renewal if they do not plan on selling any franchises in Virginia before their current registration expires; or
- Submit an amendment application and ensure their FDD’s include the required language addressing the new provisions if they will or anticipate making any franchise sales in Virginia on or after July 1.
Franchisors that ignore this guidance and violate the new law face significant penalties under the Act’s existing enforcement framework, including:
- Revocation or refusal to renew a franchise registration.
- A civil fine of up to $25,000 per violation.
- An injunction prohibiting the conduct.
- Willful violations with intent to defraud may constitute a Class 4 felony, and knowing violations may be prosecuted as misdemeanors punishable by fines up to $5,000 and up to one year of imprisonment. Franchisees may also pursue private civil remedies, including an action for damages and reasonable attorney’s fees.
Franchisors operating in multiple jurisdictions should account for Virginia’s new requirements when reviewing their system-wide franchise agreements and disclosure documents. Because the governing-law mandate disrupts the common franchisor practice of applying a single state’s law across all franchise locations, compliance may require Virginia-specific addenda or revised form agreements rather than a simple disclosure update.
Experienced franchise counsel can prepare, update, and submit FDDs, franchise agreements, and state-specific addenda to ensure compliance ahead of the July 1 effective date.
Matthew J. Soroky is a Certified Specialist in Franchise & Distribution Law by the State Bar of California Board of Legal Specialization.