TERRITORY AND RELATIONSHIP IN FRANCHISING

Rudolf Kotik

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Rudolf Kotik

The corollary of the exclusive or protected territory, a right granted to the Franchisee, is a restriction on the area within which the Franchisee may conduct his business. If Franchisees have the ability to sell outside their immediate markets and are able to market and sell in the territories of adjacent Franchisees, restrictions on such marketing may be necessary to make exclusive or protected territories meaningful.  

Franchisors also impose such restrictions to force a Franchisee to fully exploit his assigned territory and to maintain the quality of the product or the service sold by the Franchisee. Confining Franchisees to their specific markets can result in troublesome enforcement problems for the Franchisor. The Franchisor will be expected to enforce the restriction against the invading Franchisee and may have a legal obligation to do so. The invading Franchisee may be highly productive, have effectively penetrated his own market and invades the territory of the adjacent Franchisee primarily because that territory has not been effectively penetrated.  Disciplining a productive Franchisee to aid a lazy or ineffective Franchisee is not an enviable task. Some competition among Franchisees may be beneficial to the network.

Franchisors typically prohibit their franchises from having investments in or performing services for a competitive business.  This prohibition is intended to protect confidential information, maintain the Franchisor’s revenue, prevent the use by competitors of the Franchisor’s know-how and focus the Franchisee’s efforts on his franchised business. Such prohibitions are sometimes limited to the Franchisee’s territory or a larger territory, but frequently have no geographic limitation.  Prohibited competitive business may be defined broadly, including related types of business. Such prohibitions are a deterrent to the Franchisee and a risk to termination of his franchise if he does not comply. We call that the Covenance clause in the Franchise Agreement.

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