Legal Question in Business Law in California

You have done a good job of spotting an issue, but have not provided anywhere near enough information to provide an answer. By charging payment for the territory, you definitely have stepped into the realm of franchise but it is not automatically one just based on that. Whether it is actually a franchise depends on a lot more than whether payment is made for the territory, and quite frankly you can make it a franchise or not depending on whether you want it to be and then how you structure the details of the arrangement. The bottom line is that you are really in a place where a few hours of direct attorney time will almost certainly save you thousands of dollars down the line, or at least be WAY worth it in peace of mind that you have a properly structured and documented arrangement. I have an associate who does exactly this kind of analysis and documentation. We would be happy to assist you and she is extremely efficient at documenting this type of transaction.

As indicated above you really need a face to face with an attorney

The short answer is: yes, it is legal to give/sell an exclusive territory to a sales rep. For this to be effective/enforceable, though, it should be in writing and spell out exactly what is expected on both sides. It would certainly be worthwhile for you to consult with an attorney before entering into such an agreement, regardless of which side you're on.