Digital Franchising: When the Franchise Territory No Longer Has Borders
As digital commerce crosses geographical boundaries, franchise deals must evolve to address online sales and territorial rights.
For decades, territorial exclusivity has been one of the defining features of the franchise relationship. A franchisee invests capital, establishes premises, employs staff and develops a customer base within an agreed geographical area. In return, the franchisor may promise not to appoint another franchisee within that territory.
The model is relatively straightforward when customers physically visit a shop, restaurant, clinic or showroom. The geographical boundary determines who serves which customers.
Digital commerce has complicated that arrangement.
A customer may live in one franchisee's territory, discover the brand through social media, place an order through the franchisor's website, pay through an e-commerce platform and have the product delivered from a location outside the customer's territory.
So, which franchisee made the sale?
More importantly, what does territorial exclusivity mean when a customer can buy from anywhere online?
This is becoming an important issue for franchisors and franchisees. Traditional franchise agreements may define territories carefully but fail to address online sales, delivery platforms, digital advertising, customer databases or click-and-collect arrangements.
The result can be disputes over lost sales, commissions, marketing rights and customer ownership.
The Territory Was Once a Map
Traditional franchise agreements generally define territory by reference to a physical area: a city, district, postal zone, shopping centre or specified radius.
The commercial bargain is clear. The franchisee invests in developing the brand locally, while the franchisor provides a degree of protection against competing franchise operations within that area.
The internet does not recognise those boundaries in the same way.
A customer can order from a franchisee several kilometres away, purchase through a national website or select whichever branch offers the fastest delivery.
The traditional concept of an exclusive territory therefore needs to answer two separate questions:
Where is the customer located? And Where did the sale originate and which franchisee fulfilled it? Those questions may produce entirely different answers.
Online Sales: Who Owns the Customer?
Consider a simple example. Franchisee A has exclusive rights to operate in Territory A, while Franchisee B operates in Territory B. A customer living in Territory A visits the brand's website and purchases a product fulfilled by Franchisee B.
Franchisee A may argue that the sale belongs to its territory because the customer lives there. Franchisee B may argue that the customer selected its stock, location or delivery service.
The franchisor may take a third position: the website is a central digital channel operated by the brand and does not belong exclusively to either franchisee.
Unless the agreement addresses the issue, each party may have a commercially reasonable interpretation.
A modern franchise agreement should therefore define what constitutes an online territorial sale and establish how such sales are allocated.
Possible approaches include allocating sales according to the customer's delivery address, the franchisee responsible for fulfilment, the source of the lead, or a predetermined revenue-sharing formula.
There is no universal solution. The appropriate model depends on the business and its operating structure.
E-Commerce Platforms And Delivery Apps
Third-party platforms can make territorial control even more complicated.
A franchisee may operate its own online store while also selling through a marketplace. The platform may automatically display its products to customers outside the agreed territory.
This creates an important distinction between passive online sales and active territorial marketing.
A franchisor may accept that a franchisee occasionally receives an order from outside its territory. It may take a different view if that franchisee deliberately targets customers in another franchisee's protected area.
The franchise agreement should distinguish between the two and establish rules for online listings, delivery areas, promotional campaigns, product availability and cross-territory sales.
Delivery applications create similar problems, particularly in restaurants, grocery, retail and other businesses where customers expect rapid fulfilment.
If two franchisees serve neighbouring areas, who receives an online order? The nearest franchisee? The branch with available stock? The franchisee offering the fastest delivery? Or the franchisee whose territory contains the customer's address?
These decisions should not be left entirely to a third-party platform's algorithm.
Digital Territories
The solution may not be to abandon territorial exclusivity, but to rethink it.
Franchisors could develop the concept of a digital territory. Rather than simply granting exclusive rights within a geographical boundary, the agreement could define the digital rights attached to that territory.
A franchisee might receive exclusive rights to localised online advertising, a dedicated local landing page, priority allocation of online orders, or a defined share of centrally generated digital revenue.
This recognises that physical and digital territories are different commercial assets.
A franchisee could therefore have physical exclusivity, digital exclusivity, or a combination of both.
Social Media And Search Advertising
Social media creates another territorial challenge. A franchisee may invest heavily in promoting the brand through Instagram, Facebook, TikTok or other platforms. Yet a digital advertisement can reach customers far beyond its physical territory.
Should a franchisee be prohibited from targeting customers outside its territory? Not necessarily. But the agreement should establish reasonable boundaries.
For example, franchisees might be permitted to advertise generally while being prohibited from deliberately targeting customers located within another franchisee's protected territory.
Alternatively, the franchisor could retain control of national and regional campaigns while franchisees conduct approved local campaigns.
Search advertising raises similar concerns. Franchisees may compete for branded keywords, location-specific searches or sponsored results.
The agreement should clarify who controls paid search campaigns and whether franchisees can bid on particular keywords, including the brand name, franchisee names and competing businesses. These provisions should also be considered alongside applicable competition and intellectual property laws.
Who Owns The Customer Database?
Digital franchising also raises a fundamental question about customer data. A franchisee may generate thousands of customer records through its website, social media campaigns, loyalty programme or local promotions.
Does that database belong to the franchisee or the franchisor? The answer should not be assumed.
The franchise agreement should address ownership, access, permitted use, processing, security and transfer of customer information, subject to applicable data protection laws. This becomes particularly important when a franchise relationship ends.
A departing franchisee may argue that it generated the customer relationships and should retain the database. The franchisor may argue that the customers belong to the wider brand ecosystem.
These rights should be established at the outset rather than negotiated during a termination dispute.
Click-And-Collect: Where Does The Sale Happen?
Click-and-collect models create another hybrid situation. A customer places an order online but collects it from a physical franchise location.
Is the sale attributed to the customer's home territory, the website, the collection location or the franchisee that fulfilled the order? The answer can materially affect revenue allocation.
The agreement should therefore establish whether revenue follows the customer, order, fulfilment location or collection location.
Competition Between Franchisees
Perhaps the most difficult issue is competition between franchisees operating under the same brand. Digital channels can turn neighbouring franchisees into direct competitors.
Two franchisees may compete for the same customer, use similar search terms, offer different discounts or attempt to rank higher in local search results. The franchisor therefore needs a transparent system for managing intra-network competition.
Rules may cover online discounting, delivery charges, digital advertising, lead ownership, customer allocation, marketplace participation and loyalty programmes.
The objective should not simply be to prevent competition. It should be to establish commercially sensible boundaries while protecting the integrity of the franchise network.
Competition-law considerations are particularly important. Restrictions relating to territories, customers, pricing or online sales may have regulatory implications depending on the jurisdiction and structure of the arrangement.
Who Controls The Digital Channel?
Another important drafting issue is control of the digital infrastructure. The franchisor may operate a central website and mobile application, while franchisees operate local social media accounts. Alternatively, each franchisee may maintain its own website and digital presence. Both models have advantages and risks.
A centrally controlled system can provide consistency but may leave franchisees with limited control over customer allocation. A decentralised model can give franchisees greater commercial freedom but create inconsistencies in branding, pricing, customer experience and data management.
The agreement should therefore identify responsibility for websites, domains, mobile applications, social media accounts, online advertising, customer databases, payment processing, digital content and third-party platforms. Digital assets should be treated as part of the franchise infrastructure, not as an afterthought.
Rethinking Territorial Exclusivity
The future of franchising may require a move away from the simple concept of an exclusive geographical territory. Instead, agreements could distinguish between several forms of exclusivity.
Physical exclusivity could protect a franchisee against competing physical outlets within a defined area.
Digital exclusivity could govern online customers, advertising and sales associated with that territory.
Marketing exclusivity could restrict targeted digital campaigns in another franchisee's area.
Fulfilment rights could determine which franchisee is entitled to service an online order.
Customer-allocation rights could determine which franchisee receives the economic benefit of a digitally generated customer.
This layered approach may provide greater certainty than trying to fit every online transaction into a traditional geographical definition.
What Should The Franchise Agreement Address?
A modern franchise agreement should expressly deal with digital territorial rights. Key issues include:
- Online sales: Whether online transactions fall within territorial exclusivity.
- Order allocation: How online orders are assigned between franchisees.
- Delivery: Permitted delivery areas and cross-territory fulfilment.
- E-commerce platforms: Who may list products and where they may be sold.
- Digital advertising: Rules governing social media and search advertising.
- Customer data: Ownership, access, processing and post-termination rights.
- Click-and-collect: Allocation of sales and revenue.
- Digital assets: Ownership and control of websites, domains and social media accounts.
- Reporting and audit: Access to digital sales and customer-allocation information.
- Third-party platforms: Responsibility for marketplace and delivery-app relationships.
These provisions should be consistent with applicable competition, intellectual property, consumer protection, data protection and e-commerce laws.
Conclusion
The internet has not eliminated franchise territories. It has made them more complex. Physical territories remain valuable, particularly for businesses dependent on premises and local customer relationships. But the customer journey increasingly begins elsewhere — through a search engine, social media post, marketplace, mobile application or brand website. The traditional territorial clause can therefore no longer operate in isolation.
The next generation of franchise agreements will need to treat physical territory, digital territory, customer ownership and online revenue allocation as separate but interconnected concepts.
For franchisors, the challenge is to achieve network-wide digital growth without undermining the investment made by individual franchisees.
For franchisees, the challenge is to ensure that promised territorial exclusivity retains genuine commercial value when customers can cross geographical boundaries with a single click.
Ultimately, the question is no longer simply “Where is the franchisee located?” It is “Where is the customer, where did the transaction originate, who fulfilled it, who owns the customer relationship and who is entitled to the revenue?”
Those questions should be answered in the franchise agreement — not left for a dispute after the first major online sale crosses the border.
Dr. Sunil Ambalavellil is the Global Executive Chairman of Kaden Boriss, an international law firm specialising in franchise and business agreements. A seasoned legal adviser, he has advised and supported the international growth of numerous global brands, helping them navigate the legal complexities of cross-border expansion.
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