Territorial protection in franchising: define franchisees’ rights

When expanding your existing business into a franchise network, decide early on how your company-owned outlets and future franchisees will serve the same markets. Territorial protection does not automatically confer rights to every customer in an area. It is a contractual arrangement that should support the franchisee’s investment, customer service and the network’s growth. A vague promise of exclusivity can instead prevent expansion and lead to disputes.

1. Distinguish between outlet location, operating territory and exclusivity

Start by mapping your existing business. Mark your company-owned outlets, customer locations, delivery areas and national accounts. Also establish where demand comes from: the local area, commuter traffic, online channels or personal customer relationships. A municipal boundary alone does not tell you whether an area can sustain a profitable business.

Distinguish between three things in your plan:

• Outlet location: where the franchisee may operate under the franchise concept.
• Service responsibility: which area or customers the franchisee will serve in practice.
• Contractual territorial protection: what the franchisor undertakes not to do within that territory.

For example, a promise not to open another outlet operating under the same concept in the territory is different from a promise to direct all online orders from that territory to one franchisee. Specify separately whether the protection also covers your company-owned outlets, temporary sales outlets or other distribution channels. Do not leave exceptions to assumptions.

Prepare a map annex and a written description of the boundaries. Specify which takes precedence if they conflict. If you use postcodes or municipal boundaries, also agree on what happens if these change. This prevents an administrative boundary change from inadvertently altering the franchisee’s commercial rights.

Assess the commercial viability of each territory individually. Customer traffic at your first company-owned outlet may depend on your reputation or an exceptionally good location. Do not use its sales figures alone as proof that a territory of the same size will be sufficient for a new franchisee.

2. Check competition law before introducing territorial sales restrictions

Finland has no specific franchising act, franchise-specific registration requirement or statutory franchise disclosure document in a prescribed format. Franchise network agreements are subject to general legislation, including the Finnish Contracts Act, Competition Act and Unfair Business Practices Act. Section 36 of the Contracts Act allows unfair contract terms to be adjusted.

EU competition rules are also central to territorial arrangements where the conditions for their application are met. Article 101 of the Treaty on the Functioning of the European Union concerns agreements between businesses that restrict competition. The Vertical Block Exemption Regulation (EU) 2022/720 sets out the conditions under which certain supply and distribution agreements may be exempted from that article’s prohibition. The regulation is not a blanket licence to divide markets freely.

In practice, you need to distinguish between active sales, such as direct approaches or advertising targeted at another territory, and passive sales, such as responding to an unsolicited customer enquiry. In certain exclusive distribution arrangements, active sales may be restricted within the limits permitted by the rules. Restricting passive sales is generally problematic, and franchisees should not be prohibited from serving customers solely because of their address.

Nor may the effective use of the internet for sales be prevented in breach of competition rules. Targeted online advertising and an unsolicited online order from a customer may require different assessments. Have any sales restrictions reviewed by a lawyer specialising in competition law before introducing them.

The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not legislation. An obligation to comply with it may arise, for example, through membership or a contract. It does not override mandatory competition rules.

3. Agree how to handle online orders and shared customers

Your existing business may already have an online shop, a centralised booking system or customers across Finland. Before promising territorial protection, decide how these will fit into the franchise network. Keeping existing customers with your own business may be justified, but it affects a new franchisee’s actual sales potential.

Document the allocation of responsibilities for each sales channel. Include at least:

• which business contracts with the customer and issues the invoice;
• who delivers the product or provides the service;
• who handles complaints and any returns;
• how the franchisee carrying out the work is paid;
• how the order is accounted for in sales reporting and fees payable under the agreement.

If a centralised system passes customer enquiries to a local franchisee, define the basis for allocating them. This might be the location where the service is required, the customer’s choice or available capacity. However, the internal allocation of enquiries does not, in itself, give you the right to prevent a franchisee from responding to an enquiry received directly from a customer.

Test the rules against concrete examples. Who is responsible for a customer who lives in one franchisee’s territory but wants a service in another town or city? What about a business customer with several sites? Document the answers before the first order causes a disagreement. If customer data is transferred between businesses, also define data protection responsibilities and the lawful basis for processing it.

4. Establish a predictable process for changing territories

The initial division of territories may not serve a growing network indefinitely. A new residential development, changes in shopping habits or a franchisee reaching full capacity may create a need for another outlet. Even so, do not reserve a vague right to reduce a territory at any time.

Agree in advance on the grounds for changes, the negotiation process and the timetable. If territorial protection depends on agreed performance requirements, define the measures clearly. Alongside sales, you might assess whether the franchisee maintains an agreed level of service capacity. Your assessment should also take account of the effects of your own ability to supply, or of system disruptions.

Any preferential right to open a new outlet also needs precise terms: how the offer will be made, how long the franchisee has to respond and what conditions they must meet to take it up. Distinguish this right from a permanent prohibition on opening new outlets in the territory.

Finally, make sure the agreement, map annex, financial projections presented to the franchisee and recruitment messages all describe the same arrangement. Limited contractual protection should not be marketed as complete exclusivity.

Practical summary: prepare a territory map, an allocation of responsibilities across sales channels and a written procedure for changes. Have these reviewed for compliance with competition law before promising territorial protection to your first franchisee.