TERRITORIAL DISPUTES OVER INTERNET – PART 3

Hundreds of older, often vague agreements are now in force in Southern California and very possibly more. These agreements cover a wide variety of franchise businesses ranging from gift retailers to pet suppliers, and the parties to these agreements must work carefully through a number of difficult issues if they want to continue doing business together.

As a rule franchisors do not leave franchisees much room to negotiate the terms of their agreements upon renewal. In fact, most can require franchisees to accept the franchisor’s “then current” agreements at the time of renewal – meaning the agreements used by the franchisor when signing up new franchisees.

In essence, this can make renewing a franchise agreement a take-it-or-leave-it proposition for franchisees. For franchisors, it may constitute a temptation to take advantage of their strength by reserving for themselves the right exclusively to engage in e-commerce.

State law in California contains many provisions protecting franchisees, but not when it comes to sharing the promise of e-commerce.

For example, California requires that franchisors get the approval of the state Department of Corporations for any uniform franchise disclosure documents they propose to use in this state. It also requires that franchisors get the department’s approval for any “material modifications” to existing agreements before presenting them to franchisees. These may include new provisions reducing or enlarging the rights or obligations of either franchisor or franchisee, including, to be sure, rights to e-commerce.

For the most part, however, these are bureaucratic burdens; the Department of Corporations seeks to police aggressive franchisors, but it typically does not withhold approval. It does require that franchisors clearly disclose the impact of any material changes so that franchisees understand them.

Even so, franchisors often have the upper hand when renewing existing agreements. Most require franchisees to show that any leaseholds material to their operations run concurrently with the agreement, which can last as long as 20 years. Many require retail franchisees to refurbish their outlets as a condition of renewal, making them look new-built, and to undergo training in current business practices. Many reduce the exclusive territory available to the franchisee or increase the royalties or fees payable to the franchisor; some require the payment of a renewal franchise fee, though it may be only a percentage of the original.

Because these requirements can involve big financial outlays, they may provoke disputes that can threaten the relationship between franchisor and franchisee. Indeed, in the franchise business as in any other, financial disputes between the parties can wreck any undertaking, and this is particularly true when the parties pursue the benefits of e-commerce.

Many such disputes loom as franchising adjusts to e-commerce. But franchisors and franchisees alike must avoid trampling on each other – because it is in the interest of each that the other prosper.

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