What can a franchisee do if a franchisor is allowing other locations to be too close to the franchisee’s location?
In our experience, we’ve had a fair number of encroachment cases over the years. One thing you can do as a franchisee is, before you buy your next one, see Michael Dady (or his colleagues) and ask him to take a look at your franchise agreement to see what the terms are, which is important for you to know as a prospective franchisee, but secondly what you might do to change it. So if you have a franchise agreement offered to you as a prospective franchisee that says “You have no territory protection. We have a right to open a store across the street from you”, some courts or arbitrators will say “Look, that’s what you signed up for so you have no right to complain. I’m sorry you got hurt, but the writing says you can do it.” Even if the writing says that, we have some arguments to make on your behalf but it would be much better if we’d seen you before you signed that agreement. Then we would have negotiated some territory protection.
So, with encroachment, we need to see what the franchise agreement says; if you’ve got good territory protection, that is a very ironclad way to stop encroachment within that area. Even if you don’t, however, there are principles of law that say “franchisors may not act in a way that deprives the franchisees of the expected fruits of the relationship.” And by that, franchisees have a right to expect that franchisors are going to work with them to promote their profitability, not do the opposite.
There’s a famous case out of California where, in fact, the franchisor was dating a franchisee and she said “I don’t want to date you anymore”, and the franchisor said “I’ll fix you, I’m going to open a company store a couple blocks away.” He did, and in that case the writing was bad for her, and she nevertheless prevailed because he didn’t have a good motive, he had a bad motive that was established. She actually suffered the loss of her business because of this.
The second thing I would say about encroachment is this: if the encroachment is so bad that it drives a franchisee’s business from black ink to red ink and puts them out of business, that is the same thing as if that franchisor sent that franchisee a notice saying “you’re terminated,” just leaving the date a little bit unclear. To the extent that the writing, or a state statue, or a common law principle prohibits termination of a franchise absent good cause, we can argue that encroachment may amount to a de facto termination without good cause. That’s a second way we can recover for franchisees, and we have.