E-Commerce has opened a new frontier for the distribution of goods and services. Along with opportunity however, it also brings difficult decisions for many franchisors. Typically, the grant of a franchise includes some form of territorial rights. The extent of those rights is now being tested in many franchise systems.
If a franchisor establishes a WEB site from which it offers products–or services–for purchase on-line, has it “encroached” upon the territorial rights it granted its “bricks and mortar” franchisees?
In one arbitration case, the arbitration panel at least preliminarily found that the franchisees were likely to prove the franchisor’s “cyber store” breached the territorial rights they were granted. As a result, the franchisor has been enjoined from selling competing products over the Internet to customers within its franchisees’ territories.
New franchisors can learn from these difficulties and avoid expensive mistakes. Too often the focus in franchise contracts is on immediate needs. The average term of a franchise agreement is five to ten years. Doing business on the Internet even fifteen years ago was a concept recognized only by computer geeks and those somehow involved in the internet’s embryonic stages. Now it is a way of life for many and the debate rages over whether many “bricks and mortar” businesses will survive into the next decade. Even the big box retailers are in trouble.
How can new franchisors avoid these problems when writing their franchise agreements? Since crystal balls are in short supply, try to be as definitive about the rights franchisees are granted as possible. At the same time, be creative. Leave room for the franchisor to change and grow, both as an operating entity and as leader of a franchise system. Be able to create new products, grow in new directions, develop additional channels of distribution while ensuring that the existing franchisees have their opportunity to thrive and grow as well.
Of course, existing franchisors face the same challenges, but they must also deal with the consequences of prior commitments and franchise agreements with broadly written grants of territorial rights and exclusivity. While litigation and arbitration are addressing the “bricks and mortar” interests versus the “franchisor in cyberspace” operations on a painful, case by case basis, such resolutions seldom contribute to a unified franchise system or healthy relationship.
A number of franchisors have attempted to deal with potential encroachment issues by working with their franchisees through various groups to solve the problem or by developing a referral program ensuring its franchisees will also benefit from Internet activities. No single answer will fit all needs. The only certainty is that creativity and flexible are most likely to allow franchisors to grow both their business and their relationship with their franchisees successfully.