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.”

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