New internet headache for man-in-a-van franchises
Geoffrey Sturgess - Consultant Solicitor, Warner Goodman Commercial
A well known B2C franchisor has contacted me recently regarding a problem with an even better known provider of directory services.
The franchisees of this network are required to contact the directory service provider in order to organise their listings in its paper directory. The sales staff of the directory in question then offer an enhanced listing in their sister on-line directory and, and here’s the problem, a pay per click advertising service.
If the franchisee decides to go for the pay per click service the directory will provide them with a free “landing page” to which those who click will be directed and one or more URLs (web addresses) incorporating the name of the franchisee’s business. That of course is likely to be the same as the business name and registered trade mark of the franchisor.
This of course dilutes the brand of the franchisor because the landing page will look nothing like his corporate style and his franchisees will now be using his trademarks in their URLs.
What is worse is that if the franchisor is trying to direct traffic to his central site so that it can be distributed to his franchisees they will be trying to use the same adwords and he will be bidding against his franchisees when trying to buy them. In essence they will be competing in the same digital space for customers that would end up with the franchisee anyway.
He can probably force his franchisees to stop doing this by enforcing his franchise agreement:
- Only use my approved advertising material
- Don’t use my trademark except as approved.
He could probably bring an action against the directory provider:
- Don’t incite my franchisees to breach their contract with me
- If you are the registrant of those URLs, hand them over to me as I have a better right because they contain my registered trademark
His franchisees are likely to be cross—after all they are paying good money for this service and there will probably be early termination charges.
Few franchisors would want to take on an international provider of directory services.
The franchisor in question has tried explaining the problem to the directory provider. They don’t understand. They have a valid arrangement with a local business. What concern is it of the franchisor?
The purpose of this note is the suggestion that franchisees should be warned about this practice and told not to get involved. Franchisors might also like to check that their franchisees are not already involved.
We would also be very interested to hear from any other franchisors with similar experiences.
For more information, you can contact Geoffrey at Warner Goodman Commercial on 023 8071 7424 or email geoffreysturgess@warnergoodman.co.uk
Tags: franchise agreement, franchise contract, franchise disputes, Franchise Legal, geoffrey sturgess
Top 5 Tips on the Smart Way to Resolve Disputes in Franchising
Fiona Boswell - Senior Associate Solicitor, Freeth Cartwright LLP
Successful franchising this year depends on taking a smart approach to resolving your disputes.
1. Focus on the deal not the dispute
Courts are focussed on the dispute – mediation focuses on the deal. Mediation is private – (no courts and potential bad publicity), cost effective – (no court costs orders); and fast – (no long waits for trials and court hearings).
If you choose to mediate you want to reach agreement rather than fall out. Going to Court is confrontational – it is all about “winners and losers”. Mediation is about negotiation – it is taking a business approach to resolving tricky situations in a way that benefits both parties.
2. Act Early
We see franchise mediations that could have resolved easier and quicker if mediation had been considered earlier.
How early is early? Right at the start, when fee payments start to be missed and when the first rumblings of discord start to happen amongst the network.
3. Take the Business Approach
Ever heard the phrase – “cutting your nose off to spite your face” well that is generally what happens when you go to court. Once done you can forget ever doing business with them again. Mediation does the opposite.
It helps (a) Preserve the relationship (b) Prevent damaging your reputation as a good franchisor (this alienates your existing franchise network and deters potential new franchisees); (c) save you time and money – disputes divert management resource from taking the franchise forward.
4. Be Creative
Mediation is more flexible than going to court. You can:
- Change the Payment Terms of franchise contracts
- Change the Contract Duration – Reduce, extend it – build in breaks
- Change your allocated territory
- Explore exit options – eg buying the business
Ultimately mediation is a creative process – it allows you to explore to options that might not otherwise be available.
5. Build it in from the Outset
Ensure your franchise contracts and operations manuals contain appropriate dispute resolution escalation procedures. The fact that you have disputes is not a bad thing – It is the way that you deal with them that matters.
It is good practice and savvy business sense to consider how you will manage disputes when they happen.
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.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
