Publication

A Franchise Lawyer’s Perspective:

The Amorphous Franchise Territory

Getting What You Pay For

By Brian A. Loffredo, Esq.

Franchised outlets are multiplying faster than fruit flies on a hot banana.  Look no further than the nearest mall to confirm this phenomenon. As a potential franchisee, you cannot expect protection from other brands invading your territory. However, you should expect that your franchisor will at least provide you with protection from your own brand, right?  Surprisingly, many franchisors do not afford the protections their franchisees expect. A franchisee’s exclusive territory can only arise from one place – the franchise agreement.  Territories do not stem from discussions with a sales representative or even the president of the franchisor.  They do not arise out of the Franchise Disclosure Document or from discussions with other franchisees. They are not a matter of practice, and they are not a constitutional right.  The bottom line is that if your territory is not clearly spelled out in the franchise agreement, you might as well consider it non-existent. A franchise agreement that references your protected territory is a great start, but it is not always the end of the analysis.  Even if a territory is set forth in the agreement, there are many situations that can affect your territorial rights. It is vital that you carefully review your franchise agreement to assure that your territorial rights are exactly as you expect them.  Set forth below are several situations to look for when reviewing a franchise territory. The “Box-In” Many franchise agreements appear to afford exclusive territories that keep other franchisees out.  They may have large paragraphs full of language discussing your “territory” and your “exclusive rights.”  However, upon close reading, these territory provisions may actually serve a different purpose – to keep you boxed in.  Such territories act to contain your business operations and do not prohibit other franchisees from operating nearby. Because these territories appear at first blush to afford protection, they can easily go unnoticed to the untrained eye. He Who Giveth Taketh Away Another frequent issue with territories is that they can be taken away, or reduced.  A common example is where a franchise agreement contains certain minimum performance levels or other required benchmarks or thresholds.  Such a franchise agreement may reserve the right to decrease your territory size in the event you fail to meet your minimum thresholds. As a franchisee, you need to recognize when your territory may be threatened. If a franchisor will not agree to remove the offending provisions, the language should be modified so that all parties are comfortable. The Sneak Attack Additionally, many franchise agreements permit a franchisor to reduce or dissolve a franchise territory upon the occurrence of certain defaults.  Franchise agreements vary as to the severity of the defaults, or the number of defaults, that will result in territory changes.  The danger lies in the fact that the grounds to reduce or dissolve a territory do not uniformly appear in the same place among franchise agreements.  While a typical franchise agreement contains a specific section dealing with territories, the provision attacking the territory may be inconspicuously buried somewhere else in the agreement. As a result, a thorough review of the franchise agreement is always necessary. The Partial Territory Franchise systems are not always comprised solely of franchisees.  In many systems, the franchisor also operates its own outlets.  While your franchise agreement may preclude other franchisees from operating in your territory, it should also preclude the franchisor and its affiliates from operating as well.  Even if your franchisor does not currently operate its own outlets, your franchise agreement should still protect you in case your franchisor decides to shift its business model somewhere in the future. The Carve-Out Many franchise agreements also reserve the right for others to operate in a territory on a limited basis or for certain types of clients.  For example, a franchise agreement may allow the franchisor, or other franchisees, to service certain types of clients, such as “national accounts,” or certain types of locations, such as stadiums, airports, or shopping mall kiosks. Depending on your location, this could reduce your pool of potential clients. In many instances, a franchisor may give you the right to service certain clients, which can benefit your business.  However, you should keep in mind that such groups may be afforded special rates or other concessions by the franchisor.  Those concessions may result in less profit for your business.  Of even more concern are situations where you are required to service certain classes of clients by the franchisor.  If the franchisor has negotiated a special deal for certain clients in your territory, you may end up locked into an arrangement that burdens your business and prevents you from pursuing more profitable customers. The above examples are not exhaustive, but represent a sampling of the issues that arise with respect to protected territories.  As a franchisee, you must be sure that your franchise territory is exactly what you understand it to be.  Relying upon conversations with franchise representatives typically causes confusion, and can lead to disastrous results, especially considering that many franchise representatives do not have an intricate legal understanding of the franchise agreement.  There is no substitute for a thorough contract review prior to signing. If you have any questions regarding the content of this article, or any other franchise law matter, please contact Brian Loffredo at 301.575.0345 or by e-mail at bloffredo@offitkurman.com You may also be interested in the following articles: