A new "FAQ 37" recently released by the Federal Trade Commission (FTC) staff makes it clear that a franchise system which reserves the right to non-traditional venues must disclose that it does not provide an exclusive territory.
The question asks whether a franchisor may state in Item 12 of its FDD that it grants an "exclusive territory" if it reserves the right to open franchised or company outlets in reserved non-traditional venues such as airports, arenas, hospitals, malls, schools, stadiums, theme parks, or state or national parks. The FTC staff answered "NO".
The frequently asked questions and answers are provided by the FTC to assist franchisors with complying with the Amended FTC Rule disclosure requirements. According to the FTC staff, an "exclusive territory" is only granted when a franchisor contractually promises not to establish "either a company-owned or franchised outlet selling the same or similar goods or services under the same or similar trademarks or service marks within the geographic area or territory granted to a franchisee." A reservation of rights to open company owned or other outlets in reserved venues negates that contractual promise and "triggers the Item 12 requirement to include a disclaimer stating that franchisees will not receive an exclusive territory."
The FTC staff made clear, however, that a franchisor can still grant an "exclusive territory" even if it reserves the right to other channels of distribution such as the Internet, telemarketing, or catalogs because these channels do not require a franchised or company outlet to be physically located in a franchisee’s territory.
In short, a lot of franchisors will have to amend their FDDs. As a franchise attorney, I cannot recall the last time I reviewed a FDD or Franchise Agreement where the franchise system did not include a "reservation of rights" provision to hold back certain non-traditional venues within a territory.
While the FTC staff opinions are not binding or reviewed by the Commission, the FAQs are authored by the FTC staff charged with enforcing the FTC Rule. Based on the new FAQ 37, franchisors should cease using the term "exclusive" to describe a franchisee's territory if the system reserves any physical locations or venues. It has become more common in recent years to see the term "protected" used instead of "exclusive" to describe a territory to avoid appearing misleading to a franchisee. Item 12 of the FDD must also be amended to disclose that the system does not grant an exclusive territory. Franchisors should speak with legal counsel and their compliance team about tailoring appropriate disclosure language for their system.