The popularity of e-commerce has made franchise encroachment an increasingly important consideration for franchisors and franchisees.
E-commerce gives franchisors the advantage of an additional channel for the distribution of goods and services. But to franchisees, internet sales may be considered franchise encroachment.
The grant of a franchise typically includes territorial rights. So when a franchisee sees a decline in sales and profits as a result of the franchisor selling products or services online, they may perceive that the franchisor is encroaching on their rights.
Franchisors may disagree with this assessment.
Is e-commerce truly a form of franchise encroachment? And how can franchisors handle encroachment issues?
Do Franchisor Websites Breach Franchisee Territorial Rights?
When a franchisor goes into the realm of e-commerce, do the online sales encroach on the legal rights of the brick-and-mortar franchisees? If the franchise agreement is well-drafted and the territorial provisions are clear, a franchisee should have no claim of franchise encroachment.
That said, some judges factor the implied covenant of good faith and fair dealing in contract law into the legal decisions on franchise encroachment. Because of this, the court may find that a franchisor’s e-commerce activity breaches a franchisee’s territorial rights.
How Can New Franchisors Avoid Encroachment Issues?
A carefully crafted franchise agreement can help protect the franchisor against disputes with franchisees. New franchisors can avoid encroachment claims by making sure that their contracts clearly state that the franchisor has the right to engage in internet sales.
In addition, new franchisors should aim to be as specific as possible about franchisee territorial rights in their franchise agreements. At the same time, the agreements should also leave room for franchisor growth and the development of additional (as-yet unknown) channels of distribution.
How Can Existing Franchisors Deal with Franchise Encroachment?
No single solution is right for every franchisor who faces an encroachment dispute concerning e-commerce activities. Litigation and arbitration can resolve the situation, but neither of these options contributes to a healthy franchisee-franchisor relationship.
Some franchisors have dealt with encroachment by working out a fair compensation package to reduce the impact of e-commerce on franchisee profits. Others have developed referral programs to allow franchisees to benefit from internet sales. Creativity and flexibility are critical to designing a solution that benefits the entire franchise system.
Successfully handling disputes with franchisees is no easy task. Franchisors need an attorney with expertise in this area — and there’s no better choice than the Franchise & Business Law Group.
Our franchise attorneys are known for providing exceptional service tailored to each client’s unique needs. We have the experience to guide you through the complex legal issues you’ll face as a franchisor. For expert assistance with franchise encroachment or for help with other franchising challenges, contact the Franchise & Business Law Group in Salt Lake City, Utah, today.