FRANCHISE LAW
Franchise Encroachment: How Franchisors Manage It
Whether a franchisor can place a new outlet near an existing franchisee — and whether the existing franchisee can do anything about it — is decided almost entirely by the territory clause in the franchise agreement and FDD Item 12, not by any general rule of fairness. Most modern franchise systems grant non-exclusive or limited “protected” territories and reserve broad rights to open additional outlets and sell through other channels. So unless the contract promises otherwise, a franchisor usually can authorize a nearby unit. The franchisor’s real job is to manage that competition so it grows the brand without cannibalizing the franchisees who built it.
This guide explains the three territory models, what Item 12 must disclose, the rights franchisors keep for themselves, and the narrow circumstances in which a franchisee can challenge encroachment in court.
What “Encroachment” Actually Means
Encroachment — the industry also calls it an “impact” issue — is when a franchisor opens, or lets another franchisee open, a competing outlet close enough to draw sales away from an existing location. It is one of the most common sources of franchisor–franchisee conflict, and the dispute almost always turns on one question: what did the franchise agreement promise about territory? If the agreement granted real exclusivity, a nearby unit may breach it. If it did not, the franchisee usually has no claim, however unfair the new location feels.
The Three Territory Models
Franchise systems fall into three territory structures, and the difference decides everything:
| Model | What the franchisor promises | Practical effect for the franchisee |
|---|---|---|
| Exclusive territory | A contractual promise not to open, or let anyone open, a same-brand outlet inside the defined area | Strongest protection — no same-brand competition in the territory |
| Protected territory | A limited promise (e.g., no other franchised unit within a radius) that still reserves company outlets or alternative channels | Partial protection — competition is restricted, not eliminated |
| No territory (non-exclusive) | No promise at all; the franchisor may open additional outlets anywhere | None — a same-brand unit can open down the street |
The FTC Franchise Rule forces this into the open. If a territory is non-exclusive, FDD Item 12 must carry a word-for-word warning that the franchisee will not receive an exclusive territory and may face competition from other franchisees, from franchisor-owned outlets, and from other channels of distribution.
What FDD Item 12 Must Disclose
Item 12 of the Franchise Disclosure Document is where territory rights live, and it must spell out three things: the franchisee’s territory and any conditions attached to it; whether the franchisor or other franchisees may compete inside that area; and whether the franchisor reserves the right to sell the same goods or services through other channels. A prospective franchisee who reads Item 12 against the franchise agreement’s territory definition knows, before signing, exactly how much protection they are buying. The marketing brochure does not control; Item 12 and the agreement do.
The Rights Franchisors Usually Keep
Even systems that advertise “protected territories” typically reserve a list of rights that limit what protection really means. Common carve-outs include franchisor-owned (company) outlets, sales through e-commerce and the brand’s own website, third-party delivery and mobile-ordering apps, national or institutional accounts (airports, stadiums, military bases, grocery channels), and the right to acquire or be acquired by a competing system. These reserved rights are not loopholes hidden in fine print — Item 12 has to disclose them — but franchisees routinely overlook how much of the market they leave open. A territory can be “exclusive” for brick-and-mortar franchised units while online and delivery sales into that same area remain entirely fair game for the franchisor.
When a Franchisee Can Challenge Encroachment
When the franchise agreement is silent on competing outlets, franchisees sometimes invoke the implied covenant of good faith and fair dealing, which most states read into every contract. The leading case is Scheck v. Burger King (S.D. Fla. 1991): because Burger King’s agreement contained no express language letting it open competing units wherever it chose, the court held that disregarding its own anti-encroachment policy could breach the implied covenant. The Eleventh Circuit’s Camp Creek Hospitality decision later organized these cases into a clear rule — where the contract expressly addresses competing outlets, the implied covenant cannot override those terms; only where the contract is silent can a franchisor be barred from acting in bad faith to capitalize on a franchisee’s location.
The practical takeaway cuts against franchisees: most modern agreements were drafted after these decisions and now reserve broad rights explicitly, which usually forecloses an implied-covenant claim. That is exactly why the territory language matters more than any sense of fairness — and why reviewing it before signing is the only reliable protection.
How Good Franchisors Manage Competition
Franchisors who manage encroachment well treat it as a system-health issue, not just a legal one. The tools are straightforward: draft Item 12 and the territory clause so expectations are unambiguous; adopt a written impact or encroachment policy that studies the effect on existing units before approving a nearby site; offer existing franchisees a right of first refusal on new locations in their area; and use development schedules so multi-unit operators, not outside competitors, fill in their own markets. None of this is legally required in most states, but systems that ignore it trade short-term unit growth for franchisee disputes, weaker resale values, and a harder time selling future franchises.
For the franchisee’s side of this question, see whether franchises give exclusive territories and the difference between an exclusive and a protected territory.
Frequently Asked Questions
Can a franchisor open a competing location near my franchise?
Usually yes, unless your franchise agreement grants an exclusive or protected territory that forbids it. If your territory is non-exclusive, FDD Item 12 will say so directly, and the franchisor may open or authorize a nearby unit.
Does an exclusive territory stop all competition?
No. An exclusive territory typically only bars another same-brand outlet inside the area. Franchisors commonly reserve e-commerce, delivery apps, national accounts, and other channels, so sales into your territory through those routes may not be protected.
Is encroachment illegal?
Encroachment is generally a contract question, not an automatic legal violation. It is actionable mainly when it breaches an express territory promise, or — where the contract is silent — when it breaches the implied covenant of good faith and fair dealing.
Where do I find my territory rights?
In FDD Item 12 and the territory section of the franchise agreement. Read them together before signing; the two documents, not the sales pitch, define what protection you actually have.
Worried about competition near your location? Reidel Law Firm reviews the FDD and franchise agreement — including the Item 12 territory terms and every reserved right — on a flat fee, with a plain-English summary and direct attorney access. Get a flat-fee FDD review → before you sign.
