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Five Questions to Ask Regarding Your Protected Territory

By Brian A. Loffredo, Esq.  Many franchisors grant to their franchisees an exclusive territory.  These territories are commonly known as protected territories, or areas of protection.  As the name suggests, the purpose of a protected territory is to provide franchisees with protection.   Despite the name, though, many franchise agreements do not provide the level of protection that franchisees believe they are receiving.  Set forth below are several questions to ask when analyzing your protected territory:

1) What Is Actually Excluded/Protected?  Many franchise agreements prevent the franchisor from placing or licensing other outlets within a franchisee’s protected territory.  However, franchise agreements oftentimes do not preclude franchisors from selling goods or services through alternative channels of distribution, such as the internet.  Franchisors typically must disclose their reservation to sell goods and services through alternative channels.  However, the disclosure may not be entirely clear.

2) Can A Zip Code Change Reduce The Territory? Over time, it has become increasingly more popular for franchisors to define protected territories using zip codes.  However, using zip codes can be dangerous to franchisees.While it does not happen often, zip codes sometimes change.  If a zip code shrinks, a franchisee can suddenly be faced with a smaller protected territory.  For this reason, it is important that franchise agreements contain language guarding against changes in zip codes.

3) Are Miles Measured By Driving Distance Or Radius?  Territories are frequently measured in miles.  For example, a franchise agreement may prohibit the franchisor from putting another franchise within five miles of a franchisee’s front door.  However, “within five miles” is ambiguous, and can mean two very different things.  It could mean that the franchisor is precluded from placing another store anywhere within a five-mile radius from the franchisee’s front door.  However, it could also mean that a franchisor is precluded from placing another store within five driving miles from the franchisee’s store.  The two interpretations are very different, and can result in drastically different territory sizes.  For this reason, it is important that franchise agreements contain un-ambiguously worded language and fully describe how the miles are calculated.

4) Is The Territory Provision Really Exclusionary?  Sometimes franchise agreements appear to afford protective territories, but don’t.  For example, a franchise agreement may state that a franchisee is required to operate within a five-mile radius.  Provisions like this are not really protective territories because they do not keep anyone out.  All they do is restrict franchisees from operating outside the designated territory.  This distinction can easily be overlooked.

5) Can The Protections Be Eliminated For Any Reason? Believe it or not, some franchise agreements contain provisions that can remove a franchisee’s protected territory upon the occurrence of a certain event.  Such events may include failures to timely pay royalties and other defaults (even minor ones), and failures to meet quotas.  Provisions like these, which often appear in a different part of the franchise agreement from the protected territory provision, can be very dangerous to franchisees.

As the above illustrates, protected territories are not all the same.  And because every franchise agreement is different, the potential dangers vary as well.  Regardless of how a territory is defined, though, it is vital that prospective franchisees obtain the assistance of experienced franchise counsel.  Franchise counsel can alert potential franchisees to problem areas in their contracts.  Even more important, franchise counsel can point out ambiguities in the franchise agreement that can lead to confusion and future disputes over the franchise agreement.   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