Franchise systems, like any modern business, face the growing need to establish an online presence. An online presence for a franchise system can take a myriad of forms – an official homepage, a social media page or the use of a third party website to deliver goods or services (eBay, Foodora, etc.). A franchisor may use such mediums to advertise, promote, to make goods or services directly available online or to allow customer enquiries. Many franchises, however, operate on a system of exclusivity according to geographic areas. A franchise system’s online presence may affect such exclusivity because the very nature of an online presence transcends geographic limits. Consequently, issues may arise and in some circumstances, online activities may breach a franchisee’s exclusive territory clause.
Exclusivity in a franchising context refers to the ability of a franchisee to exclusively operate within a specific geographic area by being the sole franchisee:
- that can exist within the geographic area;
- that can market or solicit customers within the geographic area; or
- that receives customers for a certain geographic area.
There may also be other models for franchisees to operate exclusively. The franchise agreement, being the contractual document that sets up the franchise relationship between a franchisor and franchisee, should set out the terms and conditions of the exclusivity.
If the franchise agreement provides for exclusivity but does not provide for exceptions to allow the franchisor to operate online, the franchisor may be in breach of the franchisee’s exclusivity territory clause by operating online for advertising, promotional or sales activities.
Franchise Agreement – Exceptions to Exclusivity
A franchise system based on the exclusive operation of franchisees within a certain geographic area should include exceptions to exclusivity if the franchisor has plans to operate online. The exceptions should cover the ability of the franchisor to:
- advertise/ promote online;
- obtain sales enquiries online and deal with such enquiries as they see fit (e.g. undertake the sale themselves or distribute to a franchisee in the franchise network);
- allow the immediate booking of services online; or
- allow the immediate purchase of goods online.
The breadth of the exclusivity clauses will depend on the franchise system itself. The franchisor also needs to consider the requirements of the franchisee to participate in online activities and to what extent they should do so. For example, the franchisor should consider whether a franchisee needs to:
- fulfill food delivery orders that are online purchases;
- accept customers who have online bookings for a yoga class on the franchise website;
- accept online purchases of gift certificates.
The ability to operate online is an important aspect in setting up the franchise system and therefore a vital consideration when drafting the franchise agreement.
Introducing an Online Presence
It is likely for franchise systems to contain a requirement allowing the review of the franchise agreement and the updating of the disclosure document, especially if there is an exclusivity arrangement without any exceptions.
The franchise agreement may need to undergo a thorough review to determine to what extent it allows the franchisor to operate online without breaching any exclusivity clauses. The review and subsequent update of the franchise agreement (if required) will allow new franchisees to enter into a franchise agreement with awareness of exceptions attached to exclusivity. Franchisors may need to implement an amendment to existing franchise agreements. In most cases, a franchise agreement cannot be unilaterally varied. Therefore, any changes to the agreement need the approval of the franchisee. This is important to note upon drafting a franchise agreement and when updating franchise operations.
The Franchising Code of Conduct also prescribes the disclosure of details relating to online sales by way of the disclosure document. The disclosure document of a franchise needs to be updated annually, subject to certain exceptions. If a franchisor wishes to establish an online presence, the disclosure document needs to be amended and reflect details of:
- how the franchisor wishes to make goods or services available online, including the use of third party websites;
- how profits may be shared with franchisees; or
- ways in which the franchisee may make goods or services available online.
Online activities and the online presence of a franchise system should be one of the main considerations for any franchisor, particularly to the extent that it affects exclusivity and general operations. The introduction of online activities may not necessarily breach a franchisee’s exclusivity provided that the franchise agreement is drafted to reflect the reality of the system. If you have any questions or need advice on establishing an online presence or engaging in online activities within a franchise system, contact LegalVision’s franchise lawyers on 1300 544 755.
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