Webshops by the franchisor: like it or not?

Nowadays, more and more franchisors realize that, in addition to the distribution channel formed by the franchisees, there is also another distribution channel available, namely the consumer who makes purchases via the internet. By operating a national webshop, a franchisor will be able to tap into this target group and thereby generate additional turnover. However, certain rules apply, because the franchisor must also take into account the legitimate interests of its franchisees when using a national web shop.

The Internet has become an extremely important medium to reach customers. A few years ago, Dutch consumers were still hesitant to make purchases via the internet, in particular because of the – justified or not – fear of fraud. However, that hesitation seems to have disappeared and a large proportion of orders for books and music, in any case, now take place via foreign or foreign internet sites. Some providers of goods and/or services currently only trade via the internet.

The reasons for doing business via the internet on the part of the consumer are diverse and range from simple convenience (‘not having to leave home’) to having to pay a lower purchase price compared to a ‘normal’ shop. There are also various advantages on the side of the entrepreneur, such as a ‘tighter’ inventory system, (inter)national reach of customers via the internet and – in the case of an entrepreneur who only trades via the internet – the possibility, in principle, to own living room, so that the rental of business premises, whether or not expensive, can be avoided.

A franchise formula can also benefit from the internet medium and there are various specific advantages of a webshop maintained by the franchisor. For example, the brand awareness of the entire formula among consumers can be increased by a properly designed national web shop. There are also individuals who argue that there is a large group of consumers who only view and compare the products to be purchased via the internet, but will eventually go to a physical store to make the actual purchase. The franchisees could of course benefit from this as they operate the physical stores. The franchisor may also benefit – either directly or indirectly – from the additional revenue generated by Internet sales.

Notwithstanding the foregoing, care should be exercised by the franchisor when operating a national website. For example, there could be an infringement of the exclusive territories of the franchisees, which is obviously not the intention. If the franchisor also offers the formula-related goods and/or services on its website to the consumer for a lower amount than the franchisees can afford, there could also be unlawful competition by the franchisor from its franchisees. This is of course not the intention and contrary to the duty of care that a franchisor has; in a franchise relationship, both parties must reinforce each other in order to achieve a situation in which all parties involved benefit from the franchise agreement. It would therefore not be reasonable for a franchisor to maintain a national webshop in a way that does not benefit the franchisees, but only harms them. This is all the more so now that a franchisee is, in principle, completely dependent on the franchisor from a business economic point of view and can therefore not, or only slightly, deviate from the formula.

However, various methods are conceivable in which both parties can benefit from a national webshop. Consider, for example, a system in which the franchisor receives orders from consumers via its web shop, but then ‘puts them away’ with its franchisees. Or a system in which the franchisee receives a (partial) payment for the information available in a specific district. An inventory could then be made, for example, on the basis of the postal code of the person placing the order or where the goods and/or services are actually delivered, which franchisee is eligible for this compensation. It would also be possible, for example on the basis of a zip code, to refer to the own web shop of a particular franchisee. Such options are useful because they prevent only the franchisor from benefiting from the webshop. It is also possible that franchisees suffer damage and, with or without success, take legal action to recover the damage they suffer from the franchisor. In the absence of any reciprocity, it could be argued that in certain cases a franchisor is not allowed to operate a national webshop.

Needless to say, it should not be prohibited in principle for the franchisee to maintain a website and web shop. When a franchisee uses an online store to sell products, this is considered a form of so-called passive selling, as it is a reasonable way for customers to reach the franchisee. The franchisor may set (quality) requirements for such a website/webshop, but these requirements may not go so far as to impede the franchisee’s right to use the internet as a medium.

Sometimes franchisors express their dissatisfaction with the fact that a franchisee is allowed to maintain a web shop ‘just like that’, but that the franchisor must work (much) more carefully and that is therefore not allowed ‘just like that’. Although this is incorrect in principle, since the franchisee must also act carefully in this regard, it also ignores the role of both parties in a franchise relationship. After all, in the classic system, the franchisee is the self-employed person who earns income through the operation of the formula. The franchisor must support him in this, without acting as an independent entrepreneur himself, which also ensues from the franchisor’s duty of care.

In short, a national webshop may be an excellent tool that can be a welcome addition to ‘normal’ business operations for all parties, the franchisor and the franchisees alike. However, due care must be exercised in the way in which such a web shop is operated. A franchisee is generally busy enough with his ‘normal’ competitors. A franchisor should therefore not become an additional competitor of his, whether or not unintentionally.

Ludwig & Van Dam franchise attorneys, franchise legal advice