How do franchisees co-exist without encroaching on each other’s business?

John Pratt writes:

First, not all franchise agreements grant an exclusive territory - in franchises based from retail premises, an exclusive territory would be unusual. In that situation, franchisees may well compete with each other, although they hope their franchisor does not allow franchisees to open so close to each other that they are affecting their respective ability to operate a profitable business.

In the second scenario, an exclusive territory is granted. However, competition law does not allow franchisors to prevent franchisees from responding to unsolicited enquiries from customers outside their territory. All that a franchisor can do is prevent a franchisee actively selling in another franchisee’s territory.

The real complexities arise when the clause granting exclusivity is analysed, because exclusivity can relate to customers or premises.

In the former, a franchisor indicates that it will not allow another franchisee to actively market to customers in an exclusive territory. In the latter case, a franchisor simply confirms that it will not allow another franchisee to open premises in the exclusive territory, but other franchisees would be able to actively market to customers in the territory from premises outside of it.

Finally, websites do not respect territorial restrictions and having a website does not constitute active marketing.

John Pratt is senior partner at specialist franchise firm Hamilton Pratt and has advised franchisors for over 25 years.