TERRITORIAL DISPUTES OVER INTERNET – PART 2

Like many other old-economy industries, franchisors sought to grasp the potential of the internet to revolutionize retailing in the mid-1990s. Many franchisors of retail goods, however, found that their plans conflicted with existing agreements giving their franchisees exclusive rights to operate within specific territories, shielding them from competition from other franchisees and from franchisors.

Geography is crucial to franchise retailers of perishables such as pizzas and hamburgers, which must locate near their potential customers to do business. It is less important to retailers of nonperishable products such as books, CDs, computers, electronic supplies, and the like, which can locate wherever they have access to good transportation.

The “exclusive territory” provisions in many older agreements, signed before the advent of e-commerce, commonly prevent franchisors of both perishable and nonperishable goods from competing against their franchisees in their protected territories at all. But most existing agreements either do not make it clear which party has the right to sell over the internet or, because they say nothing on the subject, may lead franchisors to think that they can do so, even in competition with their franchisees.

If they want to continue doing business together, the parties to these agreements must decide whether one or the other will have the exclusive right to engage in e-commerce or whether they will share the opportunity, and if so, under what terms. The alternative is to allow the legal system to decide for them, very possibly with unhappy consequences to both parties. In one recent legal ruling, for example, the decision went entirely in favor of the franchisor, freeing it to engage in e-commerce. Another ruling protected the exclusive territories of franchisees by permitting the franchisor to sell in protected areas via the internet only if it funneled all orders through local franchisees.

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