One of the most frustrating aspects of running a franchise is when your franchisor opens a new store nearby. Known as franchise encroachment, this can drastically undermine your business. Worse, it often happens with little to no warning and there is usually very little that you can do about it if you did not take precautions against it when you first started your franchise.
What is Franchise Encroachment?
Franchise encroachment can take numerous forms, not all of which are as open and obvious as building a new chain store right across the street. Some less obvious examples include:
- Virtual encroachment, where the franchisor sells its goods or services directly to your potential customers via the internet
- Other dual distribution arrangements, where the franchisor also directly sells to your potential customers through a different brand or chain
- Steering potential customers away from your franchise through a marketing campaign
In all of these cases, the franchisor is inhibiting your ability to earn a profit through the franchise arrangement. In some of them, it can be a direct breach of your franchise agreement.
Protect Against Encroachment in the Franchise Agreement
The potential for franchise encroachment needs to be at the front of your mind when you first start out. This is because the franchise agreement that you sign and adopt at this stage is where some of your strongest rights will be. If the agreement does not provide strong protections against encroachment, you will struggle to fight back and protect your business.
One of the most important aspects of the franchise agreement will be your territorial rights. This provision of the agreement will set out your territorial exclusivity – where the franchisor cannot build new stores. In some of the most predatory cases, your territorial exclusivity ends at your store's boundary line, letting your franchisor build a new one right next door. Negotiating for a territorial exclusivity that actually protects your interests is essential.
What You Can Do About Ongoing Encroachment
If your franchisor is using encroachment tactics, you are not powerless. However, the specific facts of the matter and the precise language used in your franchise agreement will be extremely important.
If the franchisor is violating the terms of the agreement, you may have a strong breach of contract claim to make. If it is less clear that there is a violation, you may still have a valid claim for a breach of implied covenant of good faith and fair dealing. Even if there is no explicit violation or if the franchise agreement is so tilted in your franchisor's favor, you may still get a favorable outcome if a judge finds the arrangement unconscionable.
Typically, the goal is to stop the encroaching conduct. However, there are other potential solutions, including:
- Directly paying you compensation for your reduction in profits
- Reducing your royalty rates
- Having the new franchisee pay you a portion of its profits
Franchise Lawyers at the Katz Law Group
If you think that your franchisor is encroaching on your store, you need legal representation and advice. The franchise lawyers at the Katz Law Group have helped franchisees for decades. Call them at (508) 480-8202 or contact them online.