Will a franchisor compete with franchisee businesses online?

Shelley Nadler writes:

It’s possible, even if a franchisee is granted an exclusive territory.

The nature and extent of the exclusivity that a franchisee is granted in the franchise agreement needs careful consideration. In some cases, the franchisor may continue to sell online and reserve the right to do this in the franchise agreement. This would allow the franchisor to sell to customers based in a franchisee’s ‘exclusive’ territory.

It may be the case that the franchisor will provide only certain types of goods and services online and these may not necessarily compete with the franchisee’s business. Or it may be that the franchisor has a website that obtains customer leads centrally and passes them on to franchisees.

Issues relating to territorial restrictions may be subject to UK competition law, depending on the type of franchise being operated and its market share. Competition law is complicated, but it’s important to know that franchisors operating in the UK and Europe cannot prevent franchisees from making online sales, as these are considered ‘passive sales’ and cannot be banned.

This means franchisors cannot prevent franchisees from selling online, but they can require that the franchisee’s use of the internet complies with certain standards and conditions relating to quality and brand standards.

Shelley Nadler is a legal director in Bird & Bird’s international franchising team and has many years’ experience of advising on all aspects of franchising.