FTC FAQ #37: Complying with Item 12 Territory Disclosures

Vol. 16 No. 1

By

Fox Rothschild LLP

New “FAQ #37” released by the Federal Trade Commission (FTC) makes clear that a franchise system reserving the right to develop “non-traditional venues” within territories granted to franchisees must disclose it does not provide franchisees with an exclusive territory.

According to the FTC, a franchisor that reserves the right to open franchised or company-owned outlets at “non-traditional venues,” such as airports, arenas, hospitals, malls, schools, stadiums, theme parks, or parks, physically located within a franchisee’s territory cannot state in Item 12 of its FDD that it grants an “exclusive territory.”

A franchisor may still grant an “exclusive territory” if it reserves the right to other channels of distribution within a franchisee’s territory, including the Internet, telemarketing, or catalogs, because these channels do not require an outlet to be physically located in the franchisee’s territory. However, FAQ #37 clarifies that, as soon as a franchisor reserves rights relating to the location of non-traditional venues within a franchisee’s territory (which is a fairly common, industry-wide practice), the franchisor may not use the term “exclusive territory.”

If you represent a franchise system which reserves the right to locate non-traditional venues within the territories granted to franchisees, you should:

• confirm that the FDD Item 12 disclosure includes the mandated disclaimer that franchisees will not receive an exclusive territory; and

• ensure that the franchisor cease using the term “exclusive” to describe a franchisee’s territory. As an alternative, a franchisor may consider using the term “protected” to describe a franchisee’s territory if a franchisor offers some territorial protection to franchisees but less than full exclusivity.

Under FAQ #29, the FTC will not recommend an enforcement action based on a new FAQ until a franchisor is otherwise required to revise its FDD. Therefore, any changes to Item 12 may be completed during the franchisor’s next required annual update, amendment, or renewal filing (unless state law requires otherwise). Given that the renewal season is starting soon for those franchise systems with a December 31 fiscal year end, franchise attorneys should begin tailoring compliant disclosure language for their franchisor clients or employers now.

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