When a New Burger King Threatened an Existing Franchise: The Legal Battle Over Territory, Competition and Good Faith

For many entrepreneurs, buying a franchise offers the promise of building a business around an established brand. But what happens when the brand itself becomes a source of competition, the information provided before signing proves to be inadequate, or a franchisee wants to walk away and start again?

 

Courts in different jurisdictions have confronted these questions in cases that reveal the human realities behind franchise agreements. The disputes may concern territory, disclosure or post-termination restrictions, but each involves a franchisee who has invested money, time and expectations in a business relationship that did not unfold as planned.

 

The first case, from the United States, concerns a Burger King franchisee who faced the prospect of another outlet opening just two miles from his restaurant. The second, from Canada, involves franchisees who sought to rescind their investment after discovering serious deficiencies in the franchisor's disclosure documents. The third, from the United Kingdom, examines what happened when a first-time franchisee sought to leave an underperforming business and compete independently.

 

Steven A. Scheck was an experienced Burger King franchisee operating a restaurant in Lee, Massachusetts. He had invested in the business and built his operation around one of the world's best-known fast-food brands.

 

But his relationship with Burger King contained an important limitation. His franchise agreement expressly stated that no exclusive area, market or territorial rights were granted or implied.

 

That provision became critical when Burger King approved Marriott Corporation's conversion of a Howard Johnson restaurant on the Massachusetts Turnpike into another Burger King outlet.

 

The proposed restaurant was approximately two miles from Scheck's existing restaurant.

 

For a franchisee who had spent years building a customer base, the prospect was alarming. A second outlet carrying the same brand and operating so close by could divert customers and reduce the value of the business he had worked to establish.

 

Scheck went to court, arguing, among other things, that Burger King was subject to an implied non-competition obligation and had breached the implied covenant of good faith and fair dealing.

 

Burger King relied on the express terms of the franchise agreement. If Scheck had no exclusive territory, the franchisor argued, it should be free to approve another outlet nearby.

 

The court drew a more nuanced distinction. It rejected Scheck's claim that an implied non-compete existed. The written agreement was clear that he had not been granted exclusive territorial rights.

 

But the absence of an exclusive territory did not necessarily mean Burger King had unlimited freedom to exercise its contractual discretion without regard to good faith.

 

The court noted that Burger King itself had policies designed to avoid harmful 'cannibalisation' between existing restaurants. This raised a question over whether the franchisor had acted in good faith when approving the new outlet.

 

The court therefore allowed Scheck's good-faith and fair-dealing claim to proceed, although it granted summary judgment to Burger King on the implied non-competition and promissory-estoppel claims.

 

The case highlights a fundamental tension in franchising. A franchisor needs the freedom to expand its network, while a franchisee needs confidence that its investment will not be undermined by decisions taken by the very brand it represents.

 

For franchisees, the lesson is clear: never assume that operating under a major brand automatically provides territorial protection. If location is central to the value of the investment, the agreement should be examined carefully for provisions dealing with territory, new outlets and potential encroachment.

 

For franchisors, the case offers a different warning. A contractual right to open additional outlets does not necessarily mean that the right can be exercised without regard to the obligation of good faith.

 

For Scheck, however, the dispute was ultimately about something very tangible: the value of a business he had built and the fear that another outlet carrying the same name could take away part of what he had created.

 

Canada: When a Failed Franchise Led to a Fight Over Disclosure

 

Guy and Rocksane Renaud entered the Dollar It franchise system through their company, 6792341 Canada Inc., hoping to establish a successful retail business in Ottawa.

 

Before signing, the franchisor provided a disclosure document on 31 May 2007, together with generic copies of the franchise agreement and other related documents. The franchise and associated agreements were signed on 24 June 2007.

 

The business, however, struggled almost from the beginning. Less than eight months later, on 6 February 2008, the franchisees served notice seeking to rescind the franchise under Ontario's Arthur Wishart Act (Franchise Disclosure), 2000.

 

Their argument went beyond the poor performance of the store. They alleged that the franchisor had failed to provide the disclosure required by law and sought rescission of the franchise and related agreements, together with repayment of their investment.

 

The disclosure package contained several serious deficiencies. The purported franchisor's certificate had not been signed or dated. Required financial information was missing, and there were also problems concerning the lease and territory.

 

The lower court accepted that the disclosure was incomplete but concluded that some disclosure had nevertheless been provided. That distinction was crucial.

 

Under Ontario's legislation, a franchisee who receives inadequate but recognisable disclosure may have a shorter period in which to exercise a statutory rescission right. But where the franchisor has effectively failed to provide the required disclosure, the franchisee may have access to a much longer two-year remedy.

 

The Ontario Court of Appeal took a broader view of the purpose of the legislation. It asked whether the franchisees had actually received the information necessary to make an informed investment decision. The defects were not treated as minor technical errors. The missing signed and dated certificate alone was sufficiently serious to support the conclusion that the statutory disclosure had not been provided.

 

The appeal was therefore allowed and the franchisees were entitled to rely on the longer rescission remedy.

 

The case illustrates why franchise disclosure is about far more than paperwork. For someone investing in a franchise, the decision to sign can involve savings, borrowing and a substantial personal commitment. Information supplied before the contract is signed can therefore be critical to assessing the risks of the investment.

 

The Renauds' experience also demonstrates why franchise disclosure legislation is intended to protect prospective franchisees before they commit themselves.

 

For franchisors, the message is straightforward: disclosure obligations cannot safely be treated as administrative formalities.

 

For prospective franchisees, there is an equally important lesson: receiving a disclosure document does not necessarily mean receiving legally adequate disclosure.

 

UK: When a Franchisee Tried to Start Again After the Business Failed

 

Shaun Bartlett entered the Drain Doctor franchise system without previous experience in plumbing or drainage and without experience as a company director.

 

He established Fredbar Ltd in 2018 specifically to become a franchisee of Dwyer (UK Franchising) Ltd in parts of Cardiff.

 

Bartlett completed the training provided by Dwyer and signed a ten-year franchise agreement. He was the company's director and shareholder and personally guaranteed its obligations. The financial commitment was significant.

 

Bartlett had explained during the assessment process that the franchise would become his sole source of income after leaving employment, where he had earned about £38,000 a year. He invested his savings, borrowed from a bank and paid an initial franchise fee of £35,000 plus VAT. The business, however, failed to perform as projected.

 

During its first year, it generated turnover of approximately £81,816 and a net profit of about £35,000. The turnover was substantially below the projected figure of approximately £147,913, excluding national-account work.

 

Bartlett could not afford to introduce the second van and employee he had originally planned.

 

By March 2020, he was seeking to sell the franchise. Then the COVID-19 pandemic added another layer of difficulty.

 

In April 2020, Bartlett told Dwyer that he would self-isolate for three months on medical advice because his son was vulnerable.

 

By July, he purported to terminate the franchise agreement, alleging misrepresentation, undue influence and breaches by Dwyer. He also stopped trading as Drain Doctor and began operating a competing plumbing and drainage business called Daily Drains.

 

Dwyer treated this as a repudiatory breach and sought, among other remedies, an injunction to enforce the post-termination restrictive covenants in the franchise agreement.

 

The dispute ultimately reached the Court of Appeal. The court considered not simply the wording of the restrictions but the circumstances surrounding the franchise relationship. Dwyer was a substantial franchisor, while Bartlett was a small individual operator with limited resources and no previous experience in the sector.

 

The restrictions had also appeared in a standard-form agreement and had not been meaningfully negotiated.

 

The court accepted that a franchisor has legitimate interests that may require protection after a franchise ends. But a restrictive covenant must not go further than reasonably necessary to protect those interests.

 

The Court of Appeal dismissed Dwyer's appeal, leaving the restrictive covenants unenforceable.

 

The human dimension of the case is particularly striking. Bartlett had entered the franchise hoping to create a new livelihood. He had committed his savings, borrowed money and signed a ten-year agreement. When the business underperformed and circumstances changed dramatically during the pandemic, he wanted to move on.

 

The case demonstrates why post-termination restrictions deserve careful attention from prospective franchisees.

 

A clause that may appear routine in a standard franchise agreement can have profound consequences for someone whose livelihood depends on being able to work in the same industry after leaving the network.

 

For franchisors, the decision reinforces the importance of ensuring that restrictive covenants are proportionate and genuinely connected to legitimate business interests.

 

For franchisees, the message is equally clear: the obligations imposed by a franchise agreement do not necessarily end when the business relationship does.

 

Three Cases, Three Different Risks

 

These three cases arise from very different circumstances, but together they highlight some of the most important risks in franchising.

 

In the United States, the issue was territorial encroachment and good faith. In Canada, it was the quality of information provided before the investment was made. In the United Kingdom, it was the freedom to compete after the franchise relationship ended.

 

Behind each dispute was an entrepreneur who had made a financial and personal commitment to a business. That is perhaps the most important lesson from these cases. Franchise agreements may be commercial contracts, but their consequences are often deeply personal. For the franchisee, the business can represent savings, borrowed money, professional independence and a family's financial future.

 

When the relationship breaks down, those stakes can turn a contractual disagreement into a much more consequential legal battle.

 

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