E-Commerce Channel Backfires on Franchisor

October 27, 2000

A ruling that was decided by the American Arbitration Association affects 29 markets throughout the U.S., including Texas. The ruling held that a company cannot use its own web site to compete with its franchisees.

The facts of the case are simple. Drug Emporium had a contract with its franchises that gave the franchisees the exclusive right to sell to customers in their territory only. Drug Emporium was allegedly, through its web site, offering lower prices than its franchisees which enticed customers from the franchisees’ territory to buy from Drug Emporium. Therefore, Drug Emporium was found to be encroaching on the territory of its franchisees which is against the contract. The Arbitration panel held that Drug Emporium is to direct customers to the nearest franchise if the customers attempt to purchase from them. Advice Most of the franchise agreement contracts in this case pre-date the world of e-commerce. Companies considering new e-commerce distribution channels should review existing agreements, and revise contracts for new or renewing franchisees (or dealers) to anticipate issues that have arisen with the advent of the Internet. Old agreements should be modified as needed where possible.