The Franchisor Opened or Approved a Competing Unit Near Yours: Encroachment Claims in California
Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).
Franchise encroachment, a new unit placed close to yours, can support a claim, and the agreement decides how strong it is. If the contract grants an exclusive territory and the new unit sits inside it, the claim is breach of contract. If it grants none, the Ninth Circuit has said none will be implied. Even so, applying California law, it held that a competing restaurant built within a mile and a half of a franchisee breached the implied covenant. Kolmogorov Law, P.C. litigates franchise disputes for franchisees and franchisors.
Call (909) 235-6116 or contact us online to discuss a territory or encroachment dispute.
Start with the territory clause and the reserved rights
Franchise agreements handle territory in different ways. Some grant an exclusive territory defined by a radius, a map, or a list of postal codes. Some grant a protected area with exceptions. Others license a single location and promise nothing about the ground around it.
Then read what the franchisor kept for itself. A reserved rights clause may allow company-owned outlets, sales through other channels, other brands, or units in venues such as airports and campuses.
Compare both clauses with Item 12 of the disclosure document you received. Federal rules require the franchisor to disclose whether it grants an exclusive territory. If it does not, the document must say that the franchisee will not receive one and may face competition from other franchisees, from outlets the franchisor owns, or from other channels and brands it controls. (16 C.F.R. § 436.5(l)(5).) A franchisee who received that statement should expect to be asked why it counted on exclusivity.
If a salesperson promised a territory the documents do not grant, the claim is about the sale. See our page on franchise disclosure violations and rescission.
When the contract grants exclusivity
This is the simpler case. The franchisee proves the boundary, the location of the new unit, and the franchisor's part in opening or approving it. The remedy is contract damages, the amount that compensates for the detriment the breach caused. (Civ. Code, § 3300.)
Disputes still arise over how the boundary is measured, whether a carve-out applies, and whether exclusivity lapsed because a sales target was missed. Our page on breach of an exclusivity clause covers the remedies in more detail.
When the contract is silent or gives the franchisor discretion
Where the agreement makes no express grant of an exclusive territory, the Ninth Circuit will not read one in. That does not end the analysis.
In a Ninth Circuit decision applying California law, the franchise agreement gave the franchisee no exclusive territory, and the court refused to imply one. The franchisor had built a competing restaurant within a mile and a half. Agreeing with the bankruptcy court that tried the case, the Ninth Circuit held that this breached the implied covenant of good faith and fair dealing under California law. The franchisee was entitled to expect that the franchisor would not act to destroy its right to enjoy the fruits of the contract. The court found the bad faith clear because the new restaurant could hurt the franchisee and reduce the franchisor's own royalties from that store. (In re Vylene Enterprises, Inc. (9th Cir. 1996) 90 F.3d 1472, 1477.)
The California Supreme Court has set the outer limit. The covenant applies with particular force where one party holds discretionary power that affects the other's rights. It cannot prohibit what the agreement expressly permits, because implied terms never vary express ones. (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 372-374.)
Read together, the two cases mark the ground. Silence, or a general power to approve sites, leaves room for a covenant claim. The covenant does not hand the franchisee an exclusivity term it did not negotiate, and an express reservation of the right to open units anywhere usually defeats the claim. Our page on the implied covenant of good faith explains the doctrine.
California's Franchise Relations Act does not fill the gap. Its articles address termination, nonrenewal, transfers, notices, remedies, arbitration, and venue, and none of them addresses territory. (Bus. & Prof. Code, § 20000 et seq.)
Online sales, delivery, and other channels
A competing channel raises the same questions as a competing store. Federal rules require Item 12 to disclose whether the franchisor has used, or reserves the right to use, channels such as the Internet to sell inside the franchisee's territory. It must also disclose any compensation owed for those orders. (16 C.F.R. § 436.5(l)(6).)
If the agreement reserves the channel, the claim is narrow. If it is silent, the covenant analysis above applies, and the franchisee must still prove the loss the channel caused.
Proving the loss from franchise encroachment
A drop in sales is the beginning of the proof. Contract damages must be clearly ascertainable in both their nature and origin. (Civ. Code, § 3301.) Useful evidence includes:
- Your unit's sales before and after the opening, by week.
- Comparable units that did not gain a new neighbor.
- Customer address or loyalty data showing where buyers went.
- Any impact study the franchisor ran before approving the site.
Other causes, such as a road closure or a new competitor from another brand, have to be separated out. Our page on lost profits covers the standard of proof.
If you are the franchisee
Object in writing as soon as you learn of the site, and ask for the impact analysis. Keep paying royalties while the dispute is open. Withholding payment invites a default notice, a risk described on our page about franchise termination.
If you are the franchisor
Read your reserved rights before approving the site, and follow any impact procedure the agreement or manual sets out. Record the business reasons for the location. Express contract terms are the first defense. A documented, even-handed process supports the position that discretion was used in good faith.
What to bring to the first meeting
- The franchise agreement, amendments, and the disclosure document.
- A map showing your unit, your territory, and the new unit or channel.
- Sales reports for at least two years.
- Correspondence about the new site, including any objection you sent.
Frequently asked questions
My franchisor approved a new location two miles from mine and my sales fell 30 percent. Do I have a claim?
Possibly. If your agreement grants an exclusive territory that includes the new site, you have a breach of contract claim. If it grants none, a federal appeals court applying California law has refused to imply one, but it held that building a competing unit close to a franchisee breached the implied covenant of good faith on the facts before it. An express reservation of rights usually defeats that argument.
Our franchise agreement gives no exclusive territory. Can the franchisor still be liable for opening a store next to ours?
Yes, in some cases. Applying California law, the Ninth Circuit found a breach of the implied covenant where a franchisor built a competing restaurant within a mile and a half of a franchisee that had no exclusive territory. The California Supreme Court has also held that the covenant cannot forbid what the contract expressly permits.
What is franchise encroachment?
Encroachment is the placement of a new franchised or company-owned unit, or a new sales channel, close enough to an existing franchisee to draw away its customers. The California Franchise Relations Act has no section on it. The claim is pleaded as breach of the territory clause or breach of the implied covenant of good faith and fair dealing.
Can a franchisor sell online or through delivery apps inside my territory?
It depends on the agreement. Federal rules require the disclosure document to say whether the franchisor has used or reserves the right to use other channels, such as the Internet, inside a franchisee's territory. In a California dispute, an express reservation generally controls, and silence leaves room for an implied covenant claim.
Does the California Franchise Relations Act protect a franchisee's territory?
No. The Act regulates termination, nonrenewal, transfers, notices, remedies, arbitration, and venue. It contains no article on territory or encroachment, so a California franchisee's rights come from the franchise agreement and from the implied covenant of good faith that California reads into every contract.
Talk to a California franchise dispute attorney
If a new unit or channel is cutting into your store, or you are planning a site near an existing franchisee, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is in Irvine, California.
Related reading: our franchise disputes guide, our franchise dispute practice, and business litigation.
This page provides general information about California and federal law and is not legal advice. Outcomes depend on the agreement, the facts, and the court or arbitrator.