Quite a striking matter, due to the conduct undertaken by a franchise company, has come into our offices recently. Our client has been in the business as a franchisee for over ten years and recently, the franchisor opened another store a few metres away from the former’s store despite having an “exclusive zone” granted in his favor according to their contract.
For the franchisee, this means a drastic decrease in his profits, while at the same time the inability to compete and purchase goods and products from the franchisor also on an exclusive basis.
When an ‘exclusive zone’ is agreed in favour of the franchisee, this area is identified as the area over which he has the right to operate his business, or ‘area of influence’.
The terms of the contract must clearly establish what factors determine the area of influence (geometric radius, population density per square metre according to the district or municipality in question …). The usual practice is that the franchise contract is accompanied by a chart which defines its scope.
By defining this area, the franchisee is assured that no other operating unit using the same brand can install itself in that area.
Conversely, this prohibition also extends to the franchisee himself, limiting his ability to create other companies within the area of activity of the franchise and within the same market, which in turn, may involve a clear violation of the no-competition agreement within the contract.
Several alternatives emerge from the procedural point of view:
1) Urge termination of the contract because of serious breach of contract by one of the parties. For this purpose, the law considers that the breach of contract by one of the parties is fundamental if it causes damage to the other party in such a way that they are substantially deprived from what they were entitled to expect under the contract. Supreme Court (Civil Division, Section 1, Sentence no. 532/2012 of July 30th).
Similarly, the High Court Judgment of October 21st 2005 stated that the essential feature of this contract is that “one of the parties who owns a particular brand, label, patent, emblem, formula, manufacturing technique or method or industrial or commercial activity – franchisor – grants to the other – franchisee – the right or use, for a given time and in one geographical area, under certain controlled conditions, that for which ownership is held, for delivery of a financial benefit, which is usually expressed by fixing a fee or percentage “.
2) The requirement to comply with the counterparty. The practical effects result in the removal of non-compliant behavior, and strict submission to the contractually agreed terms.
3) In either case, the previous requirement would entail damages to the defaulting party. Here, it is interesting to note some judgments that are resolved establishing criteria for quantifying damages for the infringement of the exclusive zone by the franchisor (Provincial Court of Barcelona (19th Section). Judgment no. 184/2010 of 14th April)
4) And all this, without prejudice of resulting in an accumulation of unfair competition behaviour, depending on other circumstances of the case in question and on the contractually agreed predictions.
Our experience alerts us to the possibility that our client’s case is the same as many other franchisees who are currently experiencing the same circumstances. The franchisee has to respond immediately he becomes aware that the franchisor may be violating his area of influence.
On the other hand, a franchisee with a clear expansion plan will have to evaluate, prior to signing the contract, the range of provisions relating to areas of exclusivity.
