Recently, I read an article on StartupSmart about a franchisee of a retail store who is not receiving any revenue from sales made through their franchisor’s website, even if a customer lives just down the road from the franchisee’s store.
Are such practices legal, and what can someone do if they find themselves stuck in such a situation?
You have highlighted an important and topical franchising issue, so I have asked our resident franchising expert, Cristina Cecere, for some views.
Cristina tells me people are increasingly opting to shop online rather than going into stores. For franchisees, the increased popularity of internet shopping means that often they are facing direct competition from their franchisor, as the revenue from online sales goes directly to that franchisor.
Franchise relationships are regulated by the Franchising Code of Conduct, as well as the franchising agreement. Without looking at the franchising agreement, it is not possible to see whether there is a breach of that agreement.
So let’s focus on the Code.
That Code requires a franchisor to provide detailed information to a franchisee about the franchisee’s right to operate in an exclusive or non-exclusive territory, including whether the franchisor is able to operate a similar business within the franchisee’s territory.
The problem with online sales is that the internet is not what is traditionally considered a territory, so it is currently unclear whether a franchisor is required to inform a franchisee that it is able to compete with a franchisee online.
What this means is that a franchisor may not tell its franchisees its intentions about online sales, and franchisees may not know to ask about how online sales are dealt with.
In short, unless you have specifically agreed with the franchisor, there is nothing stopping a franchisor from operating a website which directly competes with its franchisees. You may think it is not good business practice, but unfortunately that alone is not unlawful.
Thankfully, this is an issue that has been highlighted by the government in its current review of the Franchising Code of Conduct. If recommendations are followed, the government is expected to make changes to the Code to ensure a franchisor is required to disclose its rights and the rights of the franchisee to conduct and benefit from online sales.
This then at least ensures that franchisees are going in with their eyes open and can hopefully negotiate some way of sharing the online sales.
However, until those changes are made (and given the looming federal election, it is not clear when or if they will be made in the near future) potential franchisees should consider asking questions about online sales and getting some expert advice.
Craig is the founding director at Motus Legal, a non-traditional legal consulting company that specialises in corporate transactions, financial services and advisory.
