FTC Updates Definition of “Exclusive Territory”

The Federal Trade Commission (“FTC”) regulates the offer and sale of franchises at the Federal level by way of the FTC Rule, as amended in 2007 (the “FTC Rule”). Franchisors and their attorneys often submit questions to the FTC staff seeking clarification of provisions in the FTC Rule. Occasionally, the FTC staff publishes a frequently asked question and provides an answer, which answer essentially becomes law on that issue (a “FAQ”).

The FTC Rule requires franchisors to provide extensive disclosures in Item 12 of their FDDs regarding the territory rights they will grant to, or withhold from, their franchisees and specifically requires disclosure of any rights that are granted for an exclusive geographic territory. If a franchisor reserves the right to place other franchised or company owned outlets within the same territory granted to a franchisee, the franchisor must provide a specific disclaimer in Item 12 stating that franchisees “will not receive an exclusive territory”.

Before October 16, 2012, the FTC staff defined an exclusive territory as “a territory in which the franchisor contractually promises not to establish company owned or other franchised outlets selling the same or similar goods or services under the same or similar trademarks or service marks.” Franchisors interpreted this to exclude outlets located at “non-traditional venues,” such as airports, arenas, hospitals, hotels, malls, military installations, national parks, schools, stadiums and theme parks. Franchisors routinely stated in their FDDs that their franchisees would receive exclusive territories, despite the fact that they had placed, or reserved the right to place, company owned or franchised outlets at “non-traditional venues” within their franchisees’ territories.

On October 16, 2012, the FTC published FAQ 37 stating: “[I]t is the staff’s view that a franchisor that reserves the right to sell through ‘non-traditional venues’ must make the disclosure that it does not provide an exclusive territory.” Franchisors must now review their FDDs to determine whether they reserve the right to place outlets in “non-traditional venues.” If so, they must include the required disclaimer to ensure they do not run afoul of FAQ 37.

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