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When franchisors violate the protected territory of a franchisee

On Behalf of | Nov 13, 2023 | Franchise Agreements

Buying into a franchise offers a variety of benefits. It takes much less to succeed when running a company as part of an established brand than it does to create one’s own niche within a local market. Additionally, franchisors typically offer a variety of support services, including marketing coordination and training for owners and managers at franchise businesses.

One of the most important considerations when evaluating a franchise opportunity is the market demand for the goods or services that the franchise offers. Even in large markets with millions of people nearby, over-saturation of the market can be a real concern that can limit the profitability of individual franchise locations.

It is, therefore, typically important to protect a specific radius associated with a new franchise location to prevent direct competition from others buying into the same business. What happens if the franchisor does not uphold an agreement to protect a particular territory on behalf of a franchisee?

The franchise disclosure document likely holds answers

Some people beginning a franchise company make assumptions about their rights and protections. They might believe that the company will not authorize another franchise within a certain distance of their location. However, such rules are not universal. Franchisors establish protected territories on a case-by-case basis. Some people may have a contract that protects them from any direct competitors in the same zip code or county. Others may only have protection for a small geographic location and for a set amount of time.

It is, therefore, crucial to carefully review franchise disclosure documents before investing in a franchise and to be familiar with the territory protection rules in particular. If another franchisee infringes on someone’s protected territory, it may be necessary to take legal action either against the franchisee competing with an already established franchise operation or against the franchisor.

In some cases, a violation of protected territory agreements may lead to a termination of a franchise agreement or the closure of the business infringing on a prior franchisee’s rights. Other times, a franchisee may have few options if the nearby competitor is technically outside of their protected territory or the protections from their contract have expired.

Tracking business development nearby can be a crucial means of protecting what someone has invested when opening a new franchise operation. As can seeking legal guidance when questions and/or concerns arise.

NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.