Rayon protection II: limitation of the exclusive area.

Mr J. van Koetsveld – Franchise lawyer 

As a follow-up to the contribution in the previous Newsletter, this time the (possibilities of) curtailment of the exclusive franchise area will be discussed. Most franchise agreements grant the franchisee an exclusive franchise territory. In that case, the franchisor is not permitted to open a branch within the exclusive area, which consists of a street, a district, a city or even a municipality, or to grant franchise rights to a third party. For the franchisee, an exclusive territory means that he may develop franchise activities and sell and/or provide his products and/or services only within the territory allocated to him. The exclusive territory is therefore a restriction on both the franchisor and the franchisee. Under the Vertical Agreement Block Exemption Regulation, if the franchisee is not granted an exclusive franchise territory, the franchisor may not restrict the franchisee from selling products and/or services. 

It is conceivable that a franchisor may at some point have reasons to reduce or rearrange the exclusive territory originally allocated to the franchisee. This may be the case, for example, if a new shopping center is opened within the area, the population in the area is growing strongly or the market is otherwise not yet saturated. If nothing has been stipulated in the franchise agreement regarding such a situation, it is not possible for the franchisor, except with the intention of the franchisee, to reduce or otherwise infringe the exclusive territory of the franchisee. After all, the exclusive territory is granted to the franchisee for the duration of the franchise agreement and must therefore be respected by the franchisor. 

However, some franchise agreements contain provisions that allow the franchisor to limit or rearrange the exclusive franchise territory. However, before the franchisor can proceed with such curtailment/reclassification, a number of conditions, which are usually included in the franchise agreement, must be met. One of the most important conditions is that an independent market and location study must show that it is economically justified to open a new (franchise) branch within the exclusive franchise area. A number of franchise agreements also stipulate that if the franchisee does not agree to a restriction of his exclusive territory, (binding) advice can be obtained from a (disputes) committee. Pursuant to competition law, it is not permitted to leave or take such advice to the Franchise Council. This would mean that the incumbent franchisees, ie a group of competitors, would decide on further entry into the market, which is not allowed. 

Finally, the franchisor must take into account that after curtailment/reclassification of a franchisee’s exclusive territory, with the consent of the franchisee or after positive advice from a disputes committee, the responsibility of the franchisor does not end. After all, if the franchisee can demonstrate that his turnover has decreased to such an extent after the opening of the new (franchise) establishment that his business operations are no longer profitable, the franchisee can hold the franchisor responsible for this. A new branch may therefore not be at the expense of the existing branch of the franchisee. Partly to prevent such problems, a new branch within a franchisee’s franchise area will usually initially be offered to the franchisee for operation by the franchisor. 

In connection with the foregoing, it must be concluded that the restriction of an exclusive franchise territory of a franchisee is only permitted if the franchise agreement provides for this. Even if the franchise agreement provides for such a limitation, this can only be done subject to conditions and the franchisor retains a responsibility to the original franchisee.

Ludwig & Van Dam franchise attorneys, franchise legal advice