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Franchise Encroachment, Part 2

Two legal experts take up both sides of this increasingly hot topic

In Part 1 of this in-depth look at one of the hottest topics in franchising, our author spoke with two of the most recognized names on the legal side of this debate: David Kaufmann, senior partner of New York City-based law firm Kaufmann, Feiner, Yamin, Gildin & Robbins LLP, who works primarily with franchisors; and Robert Zarco, founding partner of Miami-based law firm Zarco & Pardo, who works with franchisees. Read on to see what else these two attorneys have to say on the issue:

Do you think some franchisors' e-commerce activities can be considered encroachment?

Kaufmann: Franchisor e-commerce activities are just another subset of contractual market-exploitation divisions created by the franchise agreement. If the franchise agreement permits the franchisor to engage in e-commerce to the exclusion of franchisees-or with limited participation by, or recompense to, franchisees-then franchisees shouldn't complain when such activity transpires. The adage remains the same: Read and understand your franchise agreement before signing it!

Franchisees acquire only the limited rights to sell and furnish their franchisors' goods or services through one or more defined distribution modes (such as retail units or assigned accounts)-and not through every other conceivable distribution mode developed now or hereafter. The Internet-which traverses all boundaries-is the best example of why this must be. If franchisees felt free, under some implied but nowhere memorialized "right," to establish Web sites and offer their products/services worldwide, the franchise's ability to devise a coherent e-commerce strategy would disappear. The system would quickly disintegrate thanks to a plethora of conflicting Web pages; franchisees' "virtual" encroachment on other franchisees would grow; pricing, fulfillment and return policies would be disparate; and, in general, e-chaos [would ensue].

If franchisees desire distribution rights beyond those explicitly granted by their franchise agreements, they should negotiate for them before the relationship ensues.

Zarco: Overall, I'm for franchisors' e-commerce activities, with one caveat: In e-commerce, it's difficult to limit use to one market area only. Since it's generally global in nature, it seems patently unfair to completely prevent a franchisor from carrying on its business in a manner that could be detrimental to a particular franchisee, but could benefit it and its system as a whole on a global basis.

In such a situation, the franchisor should work out a fair and reasonable compensation package to reduce the impact such expansion would have on the franchisee especially considering the potentially large reward and benefit the franchisor could receive.

Michael H. Seid is managing director of Michael H. Seid & Associates, a management consulting firm specializing in the franchise industry. Seid recently co-wrote Franchising for Dummies (IDG Books) with Wendy's founder Dave Thomas.

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