USA Law and Practice Contributed by: David B. Ramsey and Michelle Murray-Bertrand, Kaufmann Gildin & Robbins LLP
6.2 Exclusive Territories and Competing Businesses Franchisors may grant franchisees exclusive or pro - tected territories. However, the term “exclusive ter - ritory” is often used loosely in areas of law outside franchising, and does not always provide the level of protection that the term means according to franchise regulators in the USA. A truly “exclusive” territory, in US franchising, generally means that the franchisee has the exclusive right to operate within a defined geographic area and the franchisor agrees not to operate, nor permit another franchisee or third party to operate, a competing business under the same trade marks within that area. This means that the franchisor does not reserve for itself the right to, for example, sell consumer packaged goods within that area to super - markets, using the same trade marks. If the franchisor reserves any rights to itself to use the trade marks within the same area as the franchisee, it is not permit - ted to use the term “exclusive” to describe the grant. In practice, many franchisors grant franchisees “pro - tected” territories rather than fully exclusive territo - ries, reserving rights to operate or authorise others to operate, through alternative channels of distribu - tion, such as online sales platforms, mobile or deliv - ery operations, national or regional accounts, whole - sale arrangements and non-traditional venues. As a result, territorial protection typically prevents another traditional franchise location within the protected area but does not restrict other franchisors from business activities within that territory. Franchisors may generally prohibit franchisees from operating competing businesses during the term of the franchise agreement to protect the franchisor’s legitimate business interests, including safeguard - ing trade secrets and other confidential information, preventing franchisees from diverting customers, and ensuring that franchisees devote their full efforts to operating and promoting their franchised business. However, post-termination non-competition pro - visions are often met with greater scrutiny and are governed primarily by state law rather than federal antitrust law. Historically, most states have permit - ted franchisors to enforce reasonable post-term non- competition covenants in franchise agreements where the restrictions are narrowly tailored in duration, geo -
competition. Franchisors must therefore ensure that competitive restraints imposed on franchisees are rea - sonably tailored to protect legitimate business inter - ests and comply with applicable antitrust laws. Resale price restrictions illustrate how franchise-relat - ed restraints can vary by jurisdiction and by the type of restriction imposed. Under federal antitrust law, both minimum resale prices (“price floors”) and maximum resale prices (“price caps”) are generally subject to a rule-of-reason analysis. State law, however, may impose different or more restrictive requirements. California, for example, has historically taken a more restrictive approach to certain resale price restraints, although its current law is somewhat unsettled due to conflicting case law. Franchisors should therefore consider both the nature of the pricing restriction and the law of each applicable state. Non-competition covenants likewise vary significantly by state. Although enforceability generally depends on the reasonableness of the restriction and the legitimate interests it protects, some states impose substantial limitations or prohibit certain post-term restrictions altogether. Where permitted, the duration and geographic scope generally must be reasonable in light of the circumstances, including the nature of the franchise, the market served, and whether the business operates in an urban, suburban or rural area. A reasonable territory may therefore differ depending on how far customers typically travel to patronise the franchised business. Non-solicitation provisions – particularly those restrict - ing a franchisee from soliciting or hiring employees of the franchisor or other franchisees (often referred to as “anti-poaching” provisions) – have faced increased regulatory scrutiny in recent years. Several Registra - tion States have limited the enforceability of these pro - visions, including by restricting them to managerial or higher-income employees. In response, many fran - chisors have voluntarily removed broad anti-poaching restrictions from their franchise agreements or nar - rowed their scope to apply only to managerial and/or higher-income personnel.
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