FTC Issues New FAQ Which Might Require Revisions to ITEM 12 Territory Disclosure

On October 16, the FTC issued FAQ #37 which disallows franchisors from claiming to award an “exclusive territory” if it reserves the right to open franchised or company outlets in so-called “non-traditional venues” like airports, arenas, hospitals, hotels, malls, military installations, national parks, schools, stadiums and theme parks.

Many franchisors have long excluded these closed markets from territory protection due to the unique and specialized nature of operating in such venues and the need to secure franchisees that understand, and have the knowledge to navigate, the nuances of those venues. This is why you will frequently see the same few companies operating multiple brands in the same type of venue in multiple states. For example, have you ever wondered why you see the same neon-yellow-shirt-clad workers walking the isles at baseball parks across the country? It’s because those companies have spent precious time and resources figuring out how to successfully operate in a non-traditional setting—an endeavor which the vast majority of franchisees have no desire to undertake.

Importantly, and fortunately, the new FTC proclamation is not one which will prevent franchisors from continuing to making a reservation of rights for these closed markets. It does, however, require that such franchisors include the “no exclusive territory” disclosure in ITEM 12 of their franchise disclosure document (i.e., “You will not receive an exclusive territory. You may face competition from other franchisees, from outlets that we own, or from other channels of distribution or competitive brands that we control.”). With several weeks remaining in this calendar year, now may be the time to evaluate whether an FDD update is in order.

David L. Pratt II is a franchise and brand expansion attorney with DL PRATT, PC. Like all posts made on this blog, this posting is solely for informational purposes and is in no way intended to be, or to be interpreted or construed as, legal advice or as creating an attorney-client relationship

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