Robert Toth

thIs land Is my land - or Is It?

tErrItOry & On LInE SaLES ISSUES In FranchISIng

When purchasing a franchise many agreements provide the franchisee an exclusive territory set out by way of a map or postcodes or other description of an area or region in which the Franchisor and other franchisees will not compete with the Franchisee.

The franchisee therefore has the right to market and “farm” customers in that territory or area.

Local area Marketing (LaM)

A LAM is the local area marketing area granted in the agreement which may be different to the defined Territory. Often the LAM is the same as the Territory granted but it may differ. The LAM is the area in which the franchisee can market its services and products.

Exclusive territory rights

The territory granted to a franchisee may be exclusive or non-exclusive. If it is non-exclusive you need to consider the impact on your business and the impact on the value of the business when you sell in the future. Many franchises will offer a territory however many retail franchises do not and only provide a right to operate from a specific site. In some franchise business there is a need for a territory which is part of the rights the franchisee will pass on when they sell the business.

non-Exclusive

As stated often with hospitality and retail type franchises, there is no area or territory at all. For example, in the CBD you might see four or five 7 Eleven stores all in close proximity to each other and all able to compete with each other. The franchise is granted for that site and cannot move without the approval of the franchisor.

Where it is non-exclusive another franchisee or the franchisor could open a franchise close to your business and you have no right to object to it. This must be clearly set out in the franchise agreement and the disclosure document. For many services and mobile franchises, it is vital to have a protected territory for the viability of the business. The issue then arises as to how do you know if the territory being offered is right for the Business? The Franchisor ought to have done its demographic and market research to determine the territory required to service the

market and give the franchisee an adequate opportunity to build its business.

First right to take up adjoining territory

Even if you are granted a non-exclusive territory you may want to include a special condition that gives you a protected radius within which the franchisor undertakes it will not grant another franchise nor itself operate in. It may also be worth negotiating into your franchise a first right of refusal to take up any adjoining franchise that is offered by the franchisor which will give greater protection to your primary area.

good Faith issues

The Franchising Code applies to all agreements between franchisors and franchisees and requires both parties to act in good faith in their dealings with each other. While the Code does not explicitly define good faith, it can mean any conduct that is harsh, unjust or unreasonable in the circumstances. If a franchisor breaches your exclusive territory rights you can rely on that as a breach of the agreement and also the franchisor not acting in good faith.

Robert Toth is a Partner of Marsh Maher Richmond Bennison Lawyers, with over 35 years’ experience in Franchise, Licensing and Distribution law acting for both local and International franchisors, franchisees and master franchisees and with expertise in dispute resolution. Robert is an Accredited Commercial Law and Franchise Specialist, a member of the Franchise Council of Australia (FCA) and the International Franchise Lawyers Association (IFLA) and regularly writes for franchise and corporate journals online. Contact Robert@mmrb.com.au or even call him on mobile 0412 67 37 57

disputes between existing franchisees

We recently acted for a franchisor where the franchisees agreed amongst themselves to assist each other to provide services to customers in the other franchisees exclusive territory. This worked well while the franchisees were all cooperative and in agreement however it fell apart when a franchisee continued to do work in another territory without the others knowledge or consent. This led to issues as to who was entitled to the revenue from that work and who would be liable to pay the royalty and if the franchisee in the territory should bet a cut of the revenue from that work? The franchisor had policies in place in its operations manual regarding a franchisee working in another franchisees territory but even then, the issues caused friction and unrest in the franchise system. The question arose whether the franchisor was obliged to enforce the obligations of each franchisee and prevent a franchise from taking jobs outside their territory. The Franchise Code does not place any positive obligations on a franchisor however, in our view, is based on the good faith

obligations under the Code we consider a franchisor would be obliged to prevent a franchisee from encroaching into another’s exclusive territory. Where the matter could not be resolved either party can instigate the dispute resolution provisions and seek a mediation under the Code. In addition, the franchisee whose territory is being encroached could seek an injunction preventing that conduct although that would be a very costly option and only warranted if there was a lot of money at stake. Hopefully direct discussions would resolve the issue. Franchisor’s need to ensure it has clear policies in place and their agreement is clear about the rights granted.

Online issues and territories

Legally, nothing stops the franchisor from retaining exclusivity over online sales but it has led to distrust by franchisees where the franchisor has total control over the e commerce platform and sales which may take revenue away from the franchisee in their territory. The Franchise Code requires franchisors to disclose in their disclosure documents if the franchisee can sell the goods or services on line and if so:

• any restrictions or conditions on, the franchisee’s ability to make those goods and services available online;

• if the goods or services may be made available via a third party website, and if so, any conditions by the franchisor on the franchisee’s use of a third party website;

• the extent to which those goods or services may be supplied outside the territory of the franchise.

• details of whether the franchisor or associate of the franchisor; or other franchisees makes, or expects to make, goods or services available online. Franchisors also need to disclose:

• If goods or services are available online by the franchisor, (or its associate) or other franchisees the extent to which those goods or services may be supplied in the territory of the franchisee and if via a third party website—the domain name or URL of the third party website. • Details of any profit-sharing arrangements for on line sales that would affect the franchisee, and whether those arrangements may be unilaterally changed by the franchisor.

Franchisor controlling on line sales

In this model the franchisor retains control of the online store and sets up and operates the e-commerce platform including fulfillment, marketing, and online customer support. The issue here is that franchisees may feel the franchisor is siphoning local sales from franchisees territories and tsking away sales from their business, especially if the franchisor has company operated stores and they run special on line promotions.

a shared e-commerce model

The move now seems to be to a shared e-commerce model particularly due to the shift brought about rapidly by Covid and growth of on line sales where the franchisor may offer a fixed or volume-based agreement to compensate franchisees for on line sales that compete with physical sales to customers in a franchisees territory. Franchisors can help franchisees become an integral part of the e-commerce strategy by integrating online sales within their stores enabling franchisees to place orders through a centralized e-commerce website.

The shared model addresses the concerns of franchises that the franchisor is solely gaining the benefit of on line sales to their detriment.

Smart franchisors will see the benefit of having franchisees at the centre of their e-commerce success rather than compensating franchisees for their contribution to online sales.

So as is usual the devil is in the detail and seeking specialist advice from an experienced franchise law specialist will help you to make an informed decision before you commit and help you to understand your rights. What is my land may also be the land of the franchisor or another franchisee in the system so be aware! v

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