Frank Franchisee owns and operates a free-standing donut franchise. The franchisor granted Frank an exclusive donut territory. Things went well and Frank soon had more dough pun intended) than he knew what to do with. However, the donut franchisor decided to expand its reach and offered new franchises on the outskirts of Frank's territory. Frank comes to you for advice about encroachment. What is encroachment? How do you determine if the franchisor has encroached on Frank Franchisee?

Question

Quizplus · Accepted Answer

The Answer is Encroachment is defined as expansion by the franchisor beyond the point that the franchisor would have expanded had it owned all its own outlets. It occurs when franchisor sells a franchisee an outlet in a particular location, then sells another outlet in close vicinity to a different franchisee, or opens its own location.
Generally, the contractual language of the franchise agreement will determine whether impermissible encroachment has occurred. If, under the terms of the agreement, the franchisee received an exclusive territory, the franchisor is clearly prohibited from locating other units within that territory.
Many cases involve a middle ground, where the franchisor locates new units near enough to the protected territory to have a negative impact on the original franchisee. In cases where the contract language is not clear, the implied covenant of good faith will control the court's decision. The covenant of good faith imposes upon each party a duty of good faith and fair dealing. Where explicit language is lacking, the court has to determine if the franchisor's actions violated this duty. In this case, the court would have to look at the actual contract language and make a determination if the company violated the terms of the agreement or the implied covenant of good faith.

Frank Franchisee Owns and Operates a Free-Standing Donut Franchise