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How do exclusive franchise territories work?
The benefit of an exclusive territory to a franchisee is that the franchisee is protected from competition from the franchisor or another franchisee within a defined area of operation. Where an exclusive territory is granted, the franchise agreement should contain a provision preventing franchisees from actively seeking customers outside of their exclusive territory. Issues relating to territorial restrictions may be subject to UK and European Union competition law, depending on the type of franchise being operated and the market share of that franchise. Competition law is complicated and there is not sufficient room to deal with it fully here, but it is important to know that under competition laws ‘actively seeking customers’ is defined fairly narrowly in that it includes targeting customers within another franchisee’s exclusive territory by direct mail or email, target advertising, visiting customers or establishing an outlet in another franchisee’s exclusive territory. If a franchisee is prevented by his franchise agreement from actively seeking customers outside of its exclusive territory, it will not prevent that franchisee from using advertising or promotions over the internet in a way that is reasonable to reach customers to whom the franchisee is permitted to sell to under its franchise agreement. Also, where a customer is located in the exclusive territory of franchisee ‘A’, if that customer calls franchisee ‘B’, franchisee ‘B’ cannot be stopped from responding to the request.
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