Franchise Encroachment

• Date: 01 June 2010
• Published date: 01 June 2010
• DOI: http://doi.org/10.1111/j.1744-1714.2010.01094.x

Franchise Encroachment

Robert W. Emerson

n

Introduction . . .........................................192

A. The Encroachment Phenomenon . . . ................193

B. The Growth and Maturing of Franchising. . ...........194

C. Market Incursions and Sales Cannibalization: A Major Bone

of Contention Between Franchisors and Franchisees . . . . . 201

I. Territories. . .........................................205

A. Explicit Exclusivity ..............................206

B. Nontraditional Methods of Marketing and Distribution . . . 214

C. The Inadequacy of Warnings: Confusing Contract Clauses 220

D. Software and Internet Sales . . .....................223

E. Fighting an Encroachment: Challenges Via Indirect

Means, Such as Allegations of Fraud . ................229

F. Contracts Denying Exclusivity . .....................234

G. Contractual Ambiguity . ..........................239

II. Common Law Developments . . ..........................244

A. Scheck v. Burger King Corp..........................245

B. Vylene v. Naugles ................................248

C. Constructive Termination .........................252

III. Legislation .........................................255

A. Federal Proposals ...............................256

B. State Statutes . . . ...............................257

C. Is Government Intervention Beneficial? . . . ...........261

IV. Encroachment in Contexts Besides Franchising . . . ...........268

V. Franchisor–Franchisee Bargaining: An Efficiency of

Distribution and Regulation? . . .......................... 273

r2010, Copyright the Author

Journal compilation r2010, Academy of Legal Studies in Business

191

American Business Law Journal

Volume 47, Issue 2, 191–290, Summer 2010

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Huber Hurst Professor of Business Law & Legal Studies, Warrington College of Business

Administration, University of Florida. This article was recognized as the winner of the

Holmes-Cardozo Award for Best Conference Paper at the 2009 Academy of Legal Studies

in Business Annual Conference, Denver, CO.

VI. A Choice: Franchisees with Employee Rights or with

Anti-Encroachment Protections..........................281

Conclusion . . ..........................................288

INTRODUCTION

Territoriality, including the fear of encroachment, evidently is one of

humanity’s primal, ubiquitous concerns. No matter the context (personal

or commercial), no matter the group (small or large, simple or sophisti-

cated), territorial concepts present themselves. Examples abound.

For instance, in May 2008, various news outlets displayed photographs

taken from helicopters of a previously uncontactedFthat is, completely iso-

latedFtribe inhabiting a section of the border between Brazil and Peru.

1

Such discoveries

2

are not as rare as one might imagine. Worldwide, there are

approximately 100 indigenous groups thought to have had no contact with

outsiders.

3

With more than half of these aboriginal peoples living in the Am-

azon River basin,

4

Brazil has a governmental agency dedicated to the mission

of tracking ‘‘uncontacted tribes’’ and protecting t hem from encroachment.

5

1

James Sturcke, Aerial Images Prove Existence of Remote Amazon Tribe,THE GUARDIAN, May 30,

2008, http://www.guardian.co.uk/world/2008/may/30/brazil.conservation.

2

The tribe had actually been discovered long ago, but Brazilian authorities published the

photographs to convince doubters. Id.;Story of ‘‘Uncontacted Brazilian Tribe’’ Not Entirely True,

EARTHFIRST, June 28, 2008, http://earthfirst.com/story-of-%E2%80%98uncontacted-brazilian-

tribe%E2%80%99-not-entirely-true/ (‘‘[W]hile this is indeed a real uncontacted tribe, the Bra-

zilian government has known about them for decadesFso they aren’t ‘newly discovered’.’’).

3

Sturcke, supra note 1; James Sturcke, Hidden Tribes of the World,THE GUARDIAN, May 30, 2008,

http://www.guardian.co.uk/world/2008/may/30/brazil.conservation1.

4

Hannah Strange, ‘‘Man in the Hole,’’ Lone Survivor of Amazon Tribe Massacre, Escapes Ranchers’

Bullets,T

IMES ONLINE, Dec. 11, 2009, http://www.timesonline.co.uk/tol/news/world/us_and_

americas/article6952409.ece (noting that there are at least sixty-seven uncontacted tribes liv-

ing in the Brazilian rain forest); Sturcke, supra note 3 (referring to forty uncontacted tribes in

Brazil; fifteen in Peru; a handful in Bolivia, Paraguay, Ecuador, and Colombia, as well as such

tribes in New Guinea and the Andaman Islands).

5

See Fundac¸a

˜o Nacional do I

´ndio, the Brazilian Indian National Foundation, http://www.

funai.gov.br/index.html (last visited Feb. 2, 2010). An international organizationdedicated to

fostering awareness of and protection for indigenous peoples is Survival International, a

British-headquartered charity with offices in several nations. A prime concern for its entire

forty years of existence has been the encroachment upon tribal land. See http://www.survival

international.org/ (last visited Feb. 2, 2010).

192 Vol. 47 / American Business L aw Journal

This concern over territoryFone’s right to live and developFreflects a

fundamental human value, whether for a seemingly primitive tribe or for the

most complex social and business arrangements. And so we can see the

nexus between people occupying the most remote terrain on the planet and

those who have staked out a claimFafranchiseFto market rights in even

the most crowded of cities or in other commercial settings. If, as is often

postulated, humanity is inherently aggressive, then a corresponding conclu-

sion must be that all people, from Amazon tribesmen to Manhattan busi-

nesspersons, naturally fear others’ incursions onto their turf. Toprote ctone’s

market, one’s right to a territory, is thus a matter of instinct and civilization.

Anxiety about real or potential encroachment thus extends through all forms

of societyFfrom a paternalistic apprehension over possible intrusions upon

the most simple, hunting-and-gathering clan,

6

to the concerns, purely self-

interested or otherwise, of any discerning party ensconced in the modern,

complex, contractual enterprise known as the business-format franchise.

7

A. The Encroachment Phenomenon

Almost any litany of so-called abuses by franchisors prominently features

encroachment,

8

the phenomenon where the franchisor has authorized a

new franchise or established a company-owned unit within an existing fran-

chise’s market area.

9

Indeed, franchisees have long considered encroach-

ment their ‘‘number one problem.’’

10

For many franchisees an d their

advocates, encroachment has been the domestic franchising problem of

the past decade; and it remains, for many franchisees in particular and

6

See supra note 5.

7

And that is the subject of the remainder of this article.

8

ROBERT L. PURVIN,JR., THE FRANCHISE FRAUD:HOW TOPROTECT YOURSELF BEFORE AND AFTER

YOU INVEST 129 (1994) (‘‘To most franchisee victims of established franchise systems,

encroachment represents a major manifestation of The Franchise Fraud.’’).

9

For more on encroachment, see Harold Brown, Franchising: The 20-Year Agreement, N.Y.L.J.,

Oct. 22, 1992, at A3.

10

According to the president of the American Franchisee Association, encroachment has long

been a huge problem for franchisees. Richard Gibson, Legal Beat: Court Decides Franchisees Get

Elbow Room,W

ALL ST.J., Aug. 14, 1996, at Bl. See also Andrew R. Friedman, The New UFOC: A

Franchisee’s Perspective,in THE FLORIDA BAR,PRACTICAL ASPECTS OF FRANCHISEE REPRESENTATION

6.1, 6.8 (Dec. 20, 1996) (‘‘One of the most litigated areas of franchise law today is the issue of

encroachment.’’).

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