Can a Franchisor Open Another Location Near Yours?

You are driving through your local commercial district when you spot a coming soon sign featuring your franchisor’s logo on a storefront just three miles from your front door. In an instant, a wave of anxiety hits. You have spent years sinking your life savings, sweat equity, and late nights into building local brand awareness. Now, your own corporate brand is moving into your backyard.

If you have questions about the legality of a franchise opening nearby, consult with a franchise attorney at Luther Lanard PC. We can help safeguard your interests, including stopping franchise encroachment. Understanding your contract boundaries is the first step towards determining your next move.

The Conflict of Proximity in Franchising

Depending on your contract, another franchisor may be allowed to open another location near yours. While franchises seek to maximize royalty fees based on gross sales, franchisees must protect their local market share and profitability. 

What Is Franchise Encroachment?

In legal terms, franchise encroachment is the placement of a competing franchise operation, an alternative channel of distribution, or a sister brand in close proximity to an existing franchise. This results in the diversion of customers and sales, triggering franchise cannibalization. Instead of pulling new market share from other competitors, the new location eats away at your established customer base.

Territory makes or breaks a business. Customers typically choose the easiest path, so a new storefront positioned along a major commuting corridor can instantly cut off a segment of your regular base. When a franchisor permits this close-proximity expansion, they effectively force you to compete against the same trademark you pay to license.

Exclusive vs. Protected Franchise Territory

Whether a franchisor may utilize the same location placement depends on the type of territory exclusivity disclosed within your franchise agreement. Contractual franchise territory rights generally fall into two distinct legal categories:

Exclusive Franchise Territory Rights

An exclusive territory is a legally protected geographic area surrounding your franchise. Under this type of territory rights, the franchisor contractually agrees that the brand will not expand within the boundaries. Exclusive franchise territory protects against new locations owned by another franchisee and those operated directly by the corporate entity.

Protected Franchise Territory Rights

The more modern industry standard is a protected franchise territory. It shields the franchisee from the placement of another physical, traditional storefront within the boundaries, but also leaves room for some specific contractual exceptions, including carve-outs. 

Alternative Channels and Cannibalization of Franchises

Today, franchisor competition has evolved beyond physical brick-and-mortar store locations. Territory encroachment often occurs through online transactions, delivery apps, and other types of contractual carve-outs. When reviewing your agreement, look out for these types of common exceptions that allow franchisors to bypass your physical territory protections:

• Site-Specific Carve-Outs: Locations may be allowed within non-traditional venues with captive audiences, such as airports, stadiums, and college campuses.

• Direct-to-Consumer E-Commerce: The franchisor may sell products directly to consumers on their website, through fulfillment centers, or digital subscriptions, competing with your local sales.
• Third-Party Wholesale Distribution: A food or retail franchisor may sell branded goods wholesale to companies like local grocery stores, big-box retailers, or convenience stores within your geographic market.

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• Delivery App Networks: Your agreement may allow other franchisees to configure third-party delivery apps, like DoorDash or Instacart, to fulfill orders from their neighboring territory’s kitchens or stores, but delivering within your protected zone.
• Specialized Accounts: For business-to-business or service-based franchises, franchisors often reserve the right to handle larger or national accounts at the corporate level, bypassing you entirely.

Review your Franchise Disclosure Document (FDD) Item 12 to determine the details of your protection against territory encroachment.

Item 12 of the FDD and Evaluating Your Contract Boundaries

To determine what protections you possess, you must read through Item 12 of the FDD. The Federal Trade Commission (FTC) requires franchisors to disclose in detail the geographic territory boundaries, exclusivity parameters, and reservation of rights within this section. Franchisors use several different metrics to establish your territory, each carrying its own distinct risks:

• Exact Radius Miles: This type of boundary draws a circle around your store’s front door in a straight line out from it, such as a 3-mile radius. While simple to understand, this type of territory carries the risk of failing to account for drive-time, natural traffic flows, or population density that could restrict your customer reach.

• Zip Codes: Boundaries defined by specific postal codes are easier to track on a map, but can be altered by the United States Postal Service at will, leaving the edges of your territory open to interpretation.
• Natural Boundaries: Franchisors often use highways, rivers, or county lines to segment markets. These can create uneven territory shapes, leaving highly lucrative nearby areas unprotected.

Regardless of the metric used to define boundaries, you need to protect yourself against ambiguous contract language that gives corporate entities the ability to shrink your market after you have invested in the area. At Luther Lanard PC, we help you evaluate and negotiate agreements prior to buying a franchise business. If you are already a successful franchisee, we can help you defend your territory boundaries against encroachment.

The Implied Covenant of Good Faith and Fair Dealing

When a franchise agreement is highly ambiguous or fails to properly denote territory, franchisees may turn to a foundational legal doctrine called the implied covenant of good faith and fair dealing. This common law principle means that both sides of a contract need to play fair and not take unfair advantage that does anything to intentionally ruin the benefits of the deal they both agreed to.

In landmark legal disputes, courts examined cases where a franchisor used contractual loopholes to open secondary locations so close to an original operator that it essentially guaranteed the original business’s failure. The University of Florida Journal of Law and Public Policy published an authoritative review of how courts analyze these tactics, examining the intersection of a franchisor’s predatory expansion and the implied covenant of reasonableness.

The implied covenant of good faith and fair dealing is limited in its power. It cannot overwrite an express contractual right given to the franchisor. However, if a corporate brand acts deliberately to undermine your business, you may be able to use it as strong legal support.

Actionable Legal Steps to Protect Your Investment

If you are currently facing local market saturation or have received notice of a new nearby opening, you need to take legal steps to protect your investment.

Audit Your Franchise Documents

Locate your signed agreement and read through Item 12 detailing your franchise territory boundaries. Do not rely on verbal promises or vague corporate assurances. Take particular note of the exact geographic parameters and any reservations of rights, such as carve-outs.

Document Sales Cannibalization

If you are already seeing sales decline from a nearby store or an alternative channel, gather the facts and data. Track customer count drop-offs, year-over-year revenue loss, and instances where your regular clients appear in system data at the new location.

Submit a Formal Written Objection

Draft a clear, professional, and data-backed written objection to your franchisor. Outline how the new franchisor competition in your territory poses a risk to your business. Send this via certified mail to establish a paper trail.

Work With a Franchisee Attorney

Franchise agreements are intentionally drafted by corporate lawyers to retain as much control as possible. To level the playing field, retain a franchise attorney to help stop encroachment and market cannibalization. A lawyer experienced in franchise law can review your agreement, identify any ambiguous language, and determine the best course of action before market dilution permanently sets in.

Frequently Asked Questions (FAQs)

What is a protected franchise territory?

A protected franchise territory is a specific geographic area surrounding your location that the corporate brand promises not to open another identical, physical storefront or corporate-owned location within. This typically does not provide protection against digital franchisor competition or alternative distribution channels unless they are explicitly restricted in your agreement.

Can a franchisor open an entirely different brand near my store?

Yes, a franchisor may open an entirely different brand store near you, even if they directly compete for the same target demographic. State-specific franchise relationship laws or the doctrine of good faith may limit obvious predatory cross-brand competition.

Does an exclusive territory protect me from online sales or delivery apps?

Generally, no. Unless digital delivery zones, app sales, and localized e-commerce restrictions are explicitly written out and granted to you in the agreement, franchisors almost always retain all digital and online commerce rights on a national and global scale.

What should I do if my franchisor actively encroaches on my market?

If your franchisor is actively encroaching on your market, you need to act quickly. Provide a formal, written notice of objection to the franchisor detailing the financial impact or contract breach. Consult with a franchisee lawyer to evaluate your options to safeguard your market share.

Contact the Franchise Encroachment Lawyers at Luther Lanard PC Today

If you are concerned about corporate encroachment or competing locations bleeding your market dry, partner with Luther Lanard PC for trusted legal guidance regarding your territorial rights. Our experienced franchise attorneys fight predatory encroachment practices and ensure your brand boundaries are legally protected. Schedule a consultation today to safeguard your territory and defend your franchise interests.