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Exclusive Territory: How It Affects Franchises

Have you ever wondered why you never see a franchise business within a certain mileage of another business from the same franchisor? Like most Americans, you probably see this every day and have either never noticed it or have wondered why this is.

The reason two franchisees rarely set up shop within a certain mileage of each other is because of exclusive territory. In franchise law, exclusive territory refers to a specific geographic area that is granted to the franchisee. By including an exclusive territory clause in a franchise agreement, "the franchisor is promising not to establish either a company-owned or franchised outlet selling the same or similar goods or services under the same or similar trademarks or service marks."

It's important to point out that while this clause can land a franchisor into a particularly complex legal dispute if they do not meet the criteria settled upon in the franchise agreement, it's important to point out that a franchisor is not required by the Federal Trade Commission to include such a clause in its franchise agreements. A franchisor does have the right to "sell through alternative channels or competitive brands" provided the franchisor discloses this to a potential franchisee.

If exclusive territory is not specifically mentioned in a franchise agreement, then the FTC does require franchisors to include a disclaimer explaining that a franchisee may face competition from other franchisees or businesses that the franchisor owns or is affiliated with. This not only provides some protection to the franchisor in the event of a legal dispute but it also gives the franchisee a clear idea of what to expect in terms of possible competitors in their area that could affect their sales in the long run.

Source: The Bureau of Consumer Protection Business Center, "Amended Franchise Rule FAQ's," Accessed Dec. 3, 2014

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About Mario Herman

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Based in Washington D.C, franchisee attorney Mario Herman represents franchisees domestically and internationally in negotiation, mediation, arbitration, and litigation with their franchisors. Mr. Herman affiliates with local counsel on an as needed basis. He has practiced nationally and internationally for twenty five years, has an excellent reputation, and has very reasonable rates.

Mario Herman's column is syndicated to Blue MauMau by permission of the author. His insights and information are also available at franchise-law, and International Franchise Law.

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Franchise Operations