Franchise View: The problem with Online Directories
Geoffrey Sturgess - Consultant Solicitor, Warner Goodman Commercial
Increasing use of on line directories by those seeking to buy services is undermining the efforts of franchisors to operate territory based franchise models for non-premises based franchisees.
Once upon a time customers looked for service providers in Yellow Pages and many franchisors still use Yellow Pages coverage areas as territory boundaries. It did not matter where the franchisee was based, as potential customers in his territory would find his contact details in their local Yellow Pages. It did not matter if he operated from a base in another franchisee’s territory as customers in that territory would not find him in their Yellow Pages or Thompson Local.
Until recently the use by consumers of Yellow Pages or an on-line search for a service provider’s website allowed franchisors to direct enquiries to the correct franchisee for the relevant territory. Now however, on-line directories such as Yell.com or Google Places direct searchers to the franchisee whose address is within the prospective customer’s geographical area of search irrespective of the franchisee’s allotted territory.
Changes in technology and buyer behaviour have thus overtaken franchisors’ contracts and operations manuals based solutions to the legal prohibition on enforcing strict territorial boundaries.
That prohibition stems from competition law disapproval of “export” bans and the suppression of price competition between businesses in different territories. It means that any absolute contractual prohibition on a franchisee from providing services outside his territory is potentially void, could make the entire agreement void, and the franchisor liable to fines.
The law does however recognise that franchisees and distributors are entitled to some territorial protection (it works both ways, your freedom to sell in my territory takes unfair advantage of my investment in marketing) and permits contractual restrictions on “active” out of territory selling. This means that the franchisee can be prevented from trying to sell outside his territory but not from selling to out of territory customers who seek him out—so called “passive” sales.
Historically, really cute franchisors have insisted on their franchisees only advertising a central telephone number in their advertisements so all calls came to franchise HQ and could be diverted to the appropriate territory franchisee.
Then along came the internet and enterprising franchisees could set up their own websites. Websites, even if they contain the franchisee’s out of territory address are regarded as passive selling so franchisors could not prohibit them. Suddenly customers using the internet could find and contact the franchisee nearest to them, irrespective of his territorial rights.
Franchisors responded by requiring franchisees to have pages (their own website) on the franchisor’s central website which did not include their out of territory address and sometimes, also, to only using a central telephone number. Although strictly franchisors should not prevent franchisees having their own websites as well, in practice, if the dedicated central page did the trick, franchisees were unlikely to set up their own websites.
The latest developments however, mean that potential customers no longer need to go to the franchisor’s website. Instead they go to an on-line directory and enter the search terms “plumber” in “winchester.” If the Southampton (ten miles from Winchester) territory franchisee happens to live and have his base in Winchester and subscribes to a land line (and you cannot have broadband or use a non-geographical number without one) that land line will have a geographical telephone number. Unless is it ex-directory that number and the name of the subscriber (Superfast Plumbing (Southampton) Limited) will be picked up by the directories and provided to anyone seeking “plumber in winchester”.
The franchisee responding to the resulting call and providing services in Winchester will be passive selling. The franchisor may be in breach of competition law if it prohibits it.
There are of course possible solutions. The franchisee could be required to use an ex-directory number, subscribe in his private name, or only use a mobile phone but all of these would mean his business would not appear on the on-line directories at all.
Alternatively all calls to his landline could be diverted to the franchisor’s central number for re-direction, or the franchisee could be required to pass all such calls, to the appropriate territory franchisee or just prohibited from passive selling. He could be required to maintain an accommodation address within his territory and subscribe for his landline from there.
These solutions have various disadvantages—loss of free advertising, additional cost, and the franchisee’s unwillingness to turn away business. Furthermore all require provisions in the franchise agreement or operations manual if the franchisor is to enforce them which are likely to contravene the legal prohibition on anti-competitive practices because they are intended to prevent passive selling. A better approach might be for the franchisor to positively assist the franchise to maximise sales within his own territory using the “new technologies” part of which could be setting up a scheme which discourages (but does not prohibit) out of territory sales. There are consultancies out there with the necessary expertise and some with specific franchising experience.
The anti-competitive behaviour prohibition is of agreements and concerted practices likely to restrict or distort competition in part of the UK or EU. As mentioned above export bans (and this would include bans on exports of goods or services across the boundary between two franchisees’ territories) are regarded as likely to restrict or distort competition. On the face of it therefore doing anything to restrict passive selling by one franchisee into the territory of another is contrary to that prohibition even if not legally enforceable.
There is however one saving grace. The law acknowledges that because the prohibition is so wide (two ice-cream vendors agreeing to operate at different ends of the park could be caught) that agreements and practices are only prohibited if they cause “an appreciable effect on competition” in the relevant area.
Most franchisees operate in intensely competitive markets (the example, of plumbing, being a case in point) and are in any event micro-businesses which, however hard they try, are unlikely to create “an appreciable effect” or to attract the attention of the competition authorities.
It is of course possible that a disgruntled franchisee could argue in court that his agreement was void for breach of the prohibition but such claims have not, on the whole, been successful in the past and in any event are expensive to run which may discourage such claims.
There is also the remote possibility that a third party could bring a claim against the franchisor alleging that he paid more for his plumbing than he would have done had full competition been permitted between the different franchisees. That is very remote indeed.
If therefore the average franchisor (this excludes large international concerns with substantial market shares) is being troubled by cross territory competition between its franchisees caused by the use of on-line directories it can be reasonably confident that sensible use of technological, contractual and operating manual provisions to prevent it is unlikely to cause legal problems.
For more information, you can contact Geoffrey at Warner Goodman Commercial on 023 8071 7424 or email geoffreysturgess@warnergoodman.co.uk
Top Tips for Managing Franchise Disputes
Fiona Boswell - Senior Associate Solicitor, Freeth Cartwright LLP
People fall out over money, especially when times are hard and margins are tight. Surveys confirm that litigation is on the rise. Here are some tips from our Franchise Team on the best ways to manage your disputes.
We all know that disputes absorb management time as well as cost money. How can you best position your franchise to stay out of trouble and to deal with disputes as effectively as possible when they do arise?
Here are some simple tips, with a little help from the famous…
- “The large print giveth and the small print taketh away” (Tom Waits)
Know your own contracts and consider carefully any contract before signing - “In theory, there is no difference between theory and practice. But, in practice, there is.” (Yogi Berra)
Are your processes in place and adhered to? Do your carefully-worded contract terms apply to your dealings with the customer with whom you’ve just fallen out? Did they ever receive and agree these before you began supplying them? - “It is a capital mistake to theorize before you have all the evidence. It biases the judgment.” (Sherlock Holmes)
Evidence wins cases. Get witness statements signed before people move on. Identify and preserve relevant electronic and paper evidence at an early stage. - “Life is about timing” (Carl Lewis)
Say and write the right things at the right time. Having historic correspondence criticising your contractor’s performance and giving an opportunity for improvement will lend weight to your case when it all goes wrong and you need to part ways. - “To jaw-jaw is always better than to war-war.” (Winston Churchill)
Consider mediation: litigation snowballs and positions become entrenched very quickly. Mediation can re-establish dialogue and get parties looking to solve a problem together rather than having them at each other’s throat. - “I run on the road, long before I dance under the lights” (Muhammad Ali)
Be prepared. Come up with a game plan to resolve a dispute, as soon as you can, which assesses risk and cost and deals with how you are going to manage them. - “A stitch in time saves nine” (anon)
Know when to seek legal advice. Many disputes can be avoided and most cases are won or lost long before they get anywhere near the doors of court. Give us a call if you’d like to talk something through.
Fiona Boswell is a Senior Associate Solicitor at Freeth Cartwright LLP and Head of FC Franchise Build, Manage, Grow, Exit ™ Unit. You can contact Fiona on 0845 070 3812 or e-mail fiona.boswell@freethcartwright.co.uk
Whilst every effort has been made to ensure the accuracy of this article, it does not provide complete coverage of the subjects referred to, and it is not a substitute for professional legal advice and should not be relied upon as such.How to win a Franchise Dispute
Fiona Boswell - Senior Associate Solicitor, Freeth Cartwright LLP
A recent case undertaken by our team has highlighted the steps that a franchisor should take to win a liquidated damages claim.
A liquidated damages claim is one where the contract sets out in black and white the exact amount that the guilty party has to pay the innocent party if the contract is broken in specific ways.
Liquidated damages claims can be a bit of a minefield, since the Court will throw out the claim if it thinks that the liquidated damages are a penalty instead of being a genuine estimate of what damages the Court would award in the circumstances.
To ensure that the liquidated damages provisions in your franchise contracts are effective make sure you take the following steps.
- Keep your franchise contract under review, and liquidated damages provisions up to date.
- When your franchisees say they are leaving the franchise network, explain that the franchisee isn’t allowed just to walk away like that. Point out that you, the franchisor will incur loss from that behaviour, and would expect to be compensated for it.
- Try to work with the franchisee in putting the relationship onto an even keel - offer training and support.
- If that doesn’t work, and it is clear that the franchisee is not going to co-operate, terminate the franchise contract.
In this case the franchisor even offered to compromise on the amount of compensation that it was due. The franchisee was having none of it, and forced the matter all the way through to the court. Not only did the franchisee have to pay the liquidated damages, it also had to reimburse the franchisors legal costs on the higher, so-called “indemnity basis” because the franchisor had offered to settle the dispute early.
So, what lessons can be learned from this for franchisors:
- Keep your standard franchise contract, including the calculation of any liquidated damages provisions, under review
- Attempt to keep the relationship on track even if a franchisee becomes difficult
- Try your best to settle the dispute without troubling the Courts
Fiona will be speaking at the National Franchise Exhibition at Birmingham NEC on Friday 30 September Theatre 3 @ 4pm – Top Tips for Growing Your Business by Franchising.
Fiona Boswell is a Senior Associate Solicitor at Freeth Cartwright LLP and Head of FC Franchise Build, Manage, Grow, Exit ™ Unit. You can contact Fiona on 0845 070 3812 or e-mail fiona.boswell@freethcartwright.co.uk
Whilst every effort has been made to ensure the accuracy of this article, it does not provide complete coverage of the subjects referred to, and it is not a substitute for professional legal advice and should not be relied upon as such.