Franchisees often complain that the franchisor has opened a new store encroaching on his trade area -- the new competing store is robbing him of sales. Believing the franchisor is engaging in unfair competition practices, the franchisee starts a lawsuit.

Franchisee Lawsuits
Typically the lawsuit claims violation of the franchise agreement and of the implied covenant of good faith and fair dealing that the law finds in every contract.Also, a claim that the franchisor has violated the state’s “little FTC act” or unfair trade practices act is usually included.

Develop Clearly Defined Policies
Franchise companies are systems driven, and a written policy informing franchisees of how the company may handle new sites near an existing franchisee’s location, is essential to a successful franchise. Successful franchisors don’t improvise any aspect the company’s operations, and the encroachment policy needs to be thoughtfully established well in advance.

A good encroachment policy is one that is:

  • Written
  • Prospective
  • Based on objective data
  • Known to franchisees
  • Transparent
  • Consistently applied

A good encroachment policy will also draw on extensive franchise industry experience to deal with some of the complex issues that surface:

  • Should franchisees have exclusive territory?
  • Should the franchisor conduct an impact study before opening a new store?
  • Can the neighboring franchisee be given a right of first refusal?
  • Should the encroachment policy be mandatory?
  • Is the encroachment policy disclosed in the FDD?

Contact us for help in designing and implementing this essential tool.

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