Franchise territorial exclusivity: defining protection for franchisees

When expanding an established business into a franchise network, one question soon arises: “Will you open another branch in the same town?” The answer should not be left as a verbal promise. Territorial exclusivity affects both the franchisee’s investment and the franchisor’s scope for further growth. Before offering it to your first prospective franchisee, define what it protects them against, how long it lasts and which sales channels it covers.

1. Distinguish between an outlet location and an exclusive territory

Approval to open an outlet at a particular address does not in itself confer an exclusive right to operate throughout the town. Likewise, a promise that the franchisor will not open a company-owned outlet does not automatically rule out another franchisee moving in. Describe territorial protection as a specific commitment, not a vague promise of “exclusivity”.

Before drafting the agreement, answer these questions:

• Does the protection prevent the franchisor from opening a company-owned outlet in the territory, another franchisee from opening one, or both?
• Does it cover all formats, or only a particular type of outlet?
• Does it also cover collection points, mobile sales operations or temporary stalls?
• Is the franchisee protected only against new outlets, or will there also be rules for allocating customer enquiries?

Identify exceptions in advance. If, for example, you want to retain the right to serve national corporate accounts, that reservation should not emerge only after signing. Relationships within a franchise network depend on predictable rules, not different interpretations of the same word.

2. Map the boundaries and check your existing commitments

Define the territory so that there is no doubt whether a particular address falls within it. You can use a list of municipalities or city districts, or a map with precisely drawn boundaries. If you use postcodes, check that they match the intended boundaries: they do not necessarily align with administrative divisions.

The map should form a dated and version-numbered appendix to the agreement. Specify which takes precedence if the map and written description conflict, and what happens if administrative boundaries change. Phrases such as “the area around the outlet” or “the wider town centre” are too vague for a long-term commitment.

Before offering protection, list your existing company-owned outlets, territories already promised to other franchisees and locations under negotiation. Include outlets still in development. The franchisor needs a single register of territorial commitments; otherwise, it may inadvertently promise overlapping protection to two prospective franchisees.

Also assess the size of the territory against the franchisee’s actual ability to serve customers. A large exclusive territory can block network development without ensuring that services are readily available. A boundary on a map is not, in itself, a guarantee of turnover or profitability.

3. Treat online orders separately from local protection

A customer may live in one town, order through the central online shop and collect their goods in another. Protecting only the outlet’s location is therefore not enough. Draw up rules for each purchasing channel and explain in advance what territorial protection means in each case.

For centrally placed orders, specify who contracts with the customer, who fulfils the order and whether the franchisee receives payment for local fulfilment. Service enquiries can be allocated according to where the work will be carried out, available capacity or customer choice. The mechanism you choose must be clear and workable in practice.

Test at least three scenarios: an order for delivery within the protected territory, collection outside it, and an enquiry that the local franchisee lacks the capacity to fulfil. For each, record which business is responsible and how any payment will be settled. However, do not confuse allocating work with an automatic right to prohibit franchisees from selling to customers elsewhere.

4. Have the protection reviewed under competition law

The Czech Republic has no specific franchise legislation and no mandatory registration of franchise concepts. A franchise agreement is usually concluded as an agreement not specifically defined by statute under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. Territorial protection therefore does not arise automatically simply because a contract is called a franchise agreement: it must be expressly agreed.

Freedom of contract is, however, limited in particular by Act No. 143/2001 Coll., on the Protection of Competition, and, where the relevant conditions are met, Article 101 of the Treaty on the Functioning of the European Union. Commission Regulation (EU) 2022/720 is important when assessing vertical agreements. It does not automatically approve every franchise agreement.

A key distinction is between actively targeting customers in a particular territory and passive sales, such as fulfilling unsolicited orders from those customers. Restrictions on active sales may be permissible under certain conditions, whereas a blanket ban on passive sales generally raises serious competition-law concerns. The mere availability of an online shop does not in itself amount to actively targeting another franchisee’s territory. Have any specific restriction on advertising, deliveries or accepting orders assessed by a specialist.

5. Set the duration of protection and the rules for reviewing it

If protection depends on the franchisee’s performance, use criteria that are known in advance and can be verified. These might include an opening deadline or an agreed level of service availability. Avoid conditions such as “sufficient development” without explaining how they will be assessed.

Specify the assessment period, the evidence required, the opportunity to remedy any shortfall and the consequences of failing to meet the criteria. Also allow for situations in which the franchisee cannot influence the outcome, for example because the franchisor has failed to provide agreed support. A reduction in territory should not come as a surprise based on a manual amended after the event.

Practical takeaway: Before making your first promise of exclusivity, prepare a map, a list of protected activities and exceptions, rules for online orders and review conditions. Only then should you offer that clearly defined protection to the franchisee and have it legally reviewed.