At some point in most franchise sales conversations a prospective franchisee will ask “So, what’s the size of my territory?” Some franchisors grant franchisees a geographic area, or territory, in which the franchisor agrees not to conduct certain competitive activity, like placing another unit. For some types of businesses, the territory is the only area where the franchisee can conduct marketing or serve customers.

If a franchisor decides to grant franchisees a territory, it will disclose critical details about territory protections and size in Item 12 of its Franchise Disclosure Document (“FDD”).

Below we have listed five questions that every franchisor should answer when considering whether to offer a territory to franchisees or when considering how to modify its territory structure.

  1. Should franchisees receive a territory at all?

The decision to award a territory is strongly dependent on the nature of the franchised business. Many franchisees do not receive any territory protections and face competition from the franchisor, its affiliates, or other franchisees from any location or method. These franchisees tend to be in industries that are convenience-based or relationship-based. Some of these franchises are operated in areas with high-density populations or areas with a captive audience like a university campus or sports stadium. In these situations, it is impractical to define a territory because the location of the outlet is driven by the convenience to the customer. If a territory is not awarded, the franchisee is dependent on the franchisor’s judgment in determining how close is too close for another outlet.

In contrast, brands that provide goods and services at the customer’s locations typically do award territories. Doing so incentivizes franchisees to fully develop their markets and helps prevent conflict between outlets claiming ownership of a customer.

The important thing to remember is that a franchisee is not entitled to a protected territory and the franchisor should create a territory structure that works best for its system.

  1. Will the territory be exclusive?

In the FDD, a franchisor will disclose if the territory is “exclusive.” As defined by the FTC, a territory is exclusive if “the franchisor promises not to establish either a company-owned or franchised outlet selling the same or similar goods or services under the same or similar trademarks” in the territory. This type of protection is one that the franchisee is likely most interested in.

Even if the franchisor agrees that no other company or franchised unit will be established in the territory, the franchisor should still reserve other competitive rights. What rights are specifically reserved will vary from system to system. They will also depend on the nature of the franchisor’s other business interests.

Commonly, franchisors reserve the right to use other channels of distribution to sell their goods and services within the territory. For example, a restaurant with a signature sauce may reserve the right to sell the sauce in grocery stores in the territory. This action technically competes with the franchisee but is not establishing another unit within the territory. Another very important channel of distribution for many businesses e-commerce and most franchisors reserve the right to make these sales to customers in the franchisee’s territory.

  1. How will the size of the territory be determined?

An ideal franchisee territory is one that is big enough to allow the franchisee to be financially successful and small enough that the franchisee can fully penetrate the market. A franchisor should examine data to determine how many customers are necessary to be successful and where those customers are located. Using this experience, the franchisor then defines the territory, which can refer to (1) population size, (2) distance, (3) number of target customers in the territory, or (4) well-defined regions like city boundaries of zip codes, among other options.

Examples of these definitions are below:

  • A population of no less than 75,000 people, as calculated using US Census data.
  • A three-mile radius from the location of the franchised business.
  • Containing no less than 20,000 qualified households.
  • Including the following six zip codes.
  1. Will there be circumstances when the franchisor can modify the territory?

Franchise agreements often have substantial term lengths and a lot can change in five, ten, or fifteen years, especially in a region with significant new development. Some franchisors reserve the right to re-evaluate the size of the territory during the term to account for anticipated or unanticipated changes. These adjustments to the territory are not typically unlimited and usually adjust the territory to the size that was originally intended. For example, if a suburban area has a significant population increase, the territory would be adjusted to an area containing the original population size.

Additionally, franchisors may reserve the right to change the size of the territory if a franchisee is not in compliance with its obligations under the franchise agreement. This remedy allows the franchisor to take strong action to encourage compliance, short of termination. One obligation that is often the trigger for changing territory rights is the franchisee’s failure to achieve a certain performance level like a minimum sales obligation.

  1. What are the restrictions on franchisees operating outside of the territory?

The FTC requires the franchisor to disclose in Item 12 the restrictions on what a franchisee can do outside of its territory. Consider if the franchisee will be able to:

  • Conduct advertising and marketing that occurs or targets customers outside of the territory,
  • Accept orders from customers who live outside of the territory,
  • If goods and services are normally provided only at the location, provide goods and services at off-site events, whether through the franchisee’s employees or through a third party (like a delivery service),
  • Provide services to an out-of-territory customer if the area is not currently under a franchise agreement with another franchisee, or
  • Use another channel of distribution to make sales outside of the territory.

Establishing these rules for your franchisees helps to focus their sales and marketing efforts and can reduce friction between franchisees as they compete for customers.

Discussing these questions with qualified franchise counsel will help you to structure franchisee territories in a way that balances the rights of the franchisor with the interests of the franchisee. If you are looking to implement franchise territories or have questions about what approach works best for you, reach out to Manning Fulton to assist you with determining the right strategy and drafting your Franchise Disclosure Document (“FDD”).

The average consumer probably associates franchising with the popular fast casual restaurant across the street from their office, their favorite gym down the street, or some other brick-and-mortar building where they obtain routine or specialized products and services. Franchising, however, covers a broad scope of industries and many operate without a brick-and-mortar location where the products or services are provided. These industries include on-demand auto care, residential or commercial cleaning, home and yard maintenance or upgrades, senior care, pet care, consulting, and advertising services. Further, innovative brands are increasingly taking traditional brick and mortar concepts and converting them to mobile operations to capitalize on changing consumer tastes and interests and reduce overhead costs.

These non-brick-and-mortar and mobile franchise systems can result in unique opportunities and challenges for the franchisor. As you work to develop such a franchise system, we recommend accounting for the below issues in your Franchise Disclosure Document (“FDD”).

  1. Territory Composition

There is a lot to think about as you define the composition of an optimum franchisee territory. We’ve written about this subject in more detail in another post [Link here] but want to highlight a unique consideration for non-brick and mortar systems.

In mobile franchises, the customer’s location is generally even more important than it is in brick-and-mortar franchises because the products and services are often delivered to the customer’s location, whether that be an office or residence. To maximize chances of success, the franchisee should (i) have enough potential customer locations within its territory to have a sufficient revenue stream and (ii) be able to service them in a cost-effective manner. This often means that the customers are not too far away from the franchisee’s base and that clustering of appointments is possible.

For example, a pool maintenance franchisee would need a territory size that has a sufficient customer base – people with home pools. The franchisee would also want the density of the pool owners to be high enough so that it could schedule its labor force strategically.

  1. Out of Territory Opportunities

Another decision point is whether franchisees can provide products or services to customers whose locations are outside of the territory boundaries. Most franchisees want some degree of protection against other franchisees servicing customers in their territory. However, there may be good reasons to permit this in special circumstances.

If the business model is one where a franchisee can reach service capacity, it may make sense for all parties involved to permit the adjacent franchisee to be able to service the customer temporarily. The substituting franchisee gets additional revenue, the franchisee whose territory has the customer gets the customer information to follow up for additional sale opportunities, and the franchisor receives a royalty on the revenue generated. Or, in businesses where referrals depend on relationships, a franchisee may need to be able to service the referral in another territory to preserve the personal connection.

Additionally, not all franchisee territories will be contiguous – whether that is because the brand is still growing or whether it is simply because the demand for the brand products and services is concentrated in population centers. This structure may leave customers in an area that has not been assigned to any franchisee. Many franchisors create policies to address how franchisees can service these customers. There are some cautions in doing so: (i) if the franchisee becomes too dependent on out of territory customers it may not dedicate its attention to market penetration in the assigned territory and (ii) it can be a practical challenge to transfer that out of territory customer to a different party if the franchisee has a longstanding relationship to the customer.

  1. Item 19

Item 19 of the FDD contains the disclosures that help to answer the prospective franchisee’s question, “How much money can I make with this franchise?” Franchisors can choose not to include any information in this item, but many do. Most commonly franchisors disclose Gross Sales numbers and sometimes costs, expense, and profit values.

All disclosures included in Item 19 must be capable of being substantiated and must have a “reasonable basis.” Franchisors of non-brick and mortar franchise systems need to think carefully about the nature of the territories they award to ensure that it is reasonable for a prospective franchisee to be able to achieve the same results under the current offering as franchisees in those territories. This consideration includes details such as the size, composition, and population of the territory. Ideally, a franchisee should be able to compare apples (what it receives as a territory) to apples (the types of territories granted to franchisees whose results are in Item 19).

The laws around Item 19 do permit franchisors to create subsets of data, and this may be a helpful way to address differences among franchisee territories. This is especially true if the differences are correlated with different financial results.

For instance, a franchisor may want two sets of Gross Revenues disclosures if its first 30 franchisees received materially larger territories than its most recent 50 franchisees. A franchisor may want to create multiple data sets based upon geography if the demand for franchisee goods and services varies by climate and season. By way of example, pest control businesses in Florida may enjoy a longer service season (and consequently higher revenues) than their fellow franchisees in Wisconsin.

Mobile franchise systems can fit specific customer needs and offer options to franchisees who want to work outside of the typical brick-and-mortar model. If you would like to learn more about setting up mobile franchising or non-brick and mortar franchising, please contact Carlie Smith or Ritchie Taylor at Manning Fulton.

The recent rebranding of Twitter to X has jolted users of the social media platform and the public generally. The move has been met with mixed reactions, with some praising the change as a bold new direction for the company and others criticizing it as a risky and unnecessary gamble.

From an intellectual property protection perspective, the change is puzzling both because of what Elon Musk gives up by abandoning the Twitter trademark and because of the costs and legal challenges he is inviting by changing to an arguably weaker trademark.

Twitter is a rare company to have developed such significant brand recognition and intellectual property protection across the globe. How many other brands have had their services become verbs? The company’s cost in time and fees to file for trademark registrations cannot be understated, not to mention the years of working to grow users in all corners of the world. These dollars and years of investment in the brand make the Twitter trademarks extremely valuable.

Now, the company has become even more unusual by taking the unprecedented action of suddenly abandoning its primary trademarks. Analysts suggest that between $4 billion and $20 billion in value could be lost by ceasing to use the Twitter trademark as seen on Time.com.

Elon Musk’s motivation to make the change may not be fully known but ostensibly includes his personal affinity for the term X (i.e., SpaceX, his child named “X Æ A-12,” and his former payments company X.com). The company has also stated that the rebrand opens the opportunity to expand to other goods and services that may not have fit as naturally under the Twitter trademark. Chief Executive Officer Linda Yaccarino has explained that the company has ambitions to be a global hub for “audio, video, messaging, [and] payments/banking.”

Obtaining global trademark registrations and brand recognition for X is not going to be easy. The company is unlikely to be able to obtain protections in each country for all the new goods and services to be provided. The company is likely to face lawsuits from legitimate and opportunistic plaintiffs. Moreover, with a less distinctive mark than “Twitter,” enforcing trademark infringement is going to be very challenging—particularly internationally.

As the rebranding from Twitter to X unfolds, it will likely include:

  • Numerous lawsuits initiated by X to obtain trademark rights globally
  • Numerous infringement lawsuits filed against X by plaintiffs who claim to own X already
  • Potentially hundreds of new US and international trademark filings
  • Tens of millions (if not hundreds of millions) of dollars in fees and settlement costs associated with the trademark filings and suits

The US headlines are likely to dominate in the coming weeks and months, but the international events will be just as important to X’s brand and intellectual property protection strategies.

If Elon Musk had been willing to stick with the Twitter trademarks, he would have been able to retain the value of the Twitter marks for the existing business and would have been far more likely to obtain trademark registrations for the expanded goods and services. Instead, he and the company face years of major legal and financial headaches.

You may not have a company as unique as Twitter/X, but this rebranding saga still has important lessons for small businesses.

  • Know the value that is accumulated through strategic trademark filings – both in the US and internationally
  • Research other uses of a mark you intend to use before implementing it
  • Some trademarks are stronger than others
  • Rebranding to weak trademarks or to trademarks that have not been vetted can backfile and result in unwanted legal costs and conflicts
  • Know the value of brand recognition and customer loyalty. Who will you potentially alienate with a rebrand?

Overall, the Twitter rebrand to X is a risky move that could have major legal and financial implications. It is a reminder that your intellectual property is one of your most important assets. For more information on how to protect your trademarks and brands, please contact Ritchie Taylor, Carlie Smith, or John Kellam at Manning Fulton.

On June 8, 2023, the Supreme Court handed down a unanimous decision in the case of Jack Daniel’s Properties, Inc. v. VIP Products LLC. The ruling has significant implications for trademark law, particularly concerning the fair use and non-commercial use exceptions, which both permit certain otherwise-infringing uses of a registered mark if the use qualifies for first amendment protections as parody, criticism, or commentary. In this blog post, we will explore the key aspects of the decision and its potential implications for clients with registered trademarks.

The case centered around VIP Products LLC, a company that produced a dog toy imitating the well-known Jack Daniel’s whiskey bottle, imitating its trade dress including its unique shape, black label, white letters, and the filigree surrounding the label. Jack Daniels brought a trademark infringement lawsuit against VIP Products, alleging that the dog toy created a likelihood of consumer confusion. The question before the Supreme Court was whether the dog toy constituted protected fair use parody or expressive speech under the First Amendment, thus exempting it from trademark infringement claims.

Would-be trademark infringers historically relied on the test established by Rogers v. Grimaldi. This test requires that where expressive works are concerned, a registered trademark owner cannot present a likelihood of confusion argument until a showing has been made that the infringing use i) “has no artistic relevance to the underlying work,” or ii) that the use “explicitly misleads as to the source or the content of the work.” Similarly, the non-commercial use exclusion established in the Lanham Act, shields use of a registered mark deemed non-commercial by its nature as parody, criticism, or commentary.

Until now, these two doctrines have enabled the vast majority of parodic commercial use such as VIP Products’ dog toy, however, the Supreme Court in its opinion carved out a clear exception to their applicability where a registered trademark is being used by someone other than the trademark owner to identify that other party as the source of its own products.

That is to say, the Rogers Test can no longer be used as a defense in determining fair use and parody will no longer be treated as immediately non-commercial when the infringer is using a registered mark as a trademark (a source identifier affording brand benefits to the infringer) rather than solely as an expressive use.

The Supreme Court’s decision provides trademark owners with greater confidence in asserting their rights and defending against unauthorized uses of their trademarks. Clients with registered trademarks should be aware of the potential impact of this ruling on their enforcement strategies and consult with legal counsel to ensure their rights and interests are protected to the fullest possible extent.