The franchise disclosure document (FDD) and franchise agreement that this firm typically creates for franchisor clients does not grant an exclusive territory to franchisees. Rather, the FDD defines a specific geographic territory and provides the franchisee with certain territorial protections against competition.
Notwithstanding those protections, certain rights are reserved for the franchisor. In many cases, the rights reserved for the franchisor include operating or granting the right to operate non-traditional venues (such as sites located within colleges, military bases, sports arenas, theaters, malls, airports, resorts, government facilities) and the right to conduct business through alternative channels of distribution (such as selling branded products on the internet, in warehouse stores or supermarkets).
As a result, our FDD contains the mandated disclosure to franchisees in Item 12: “[y]ou 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.”
Many FDDs and franchise agreements currently in use describe the territory granted to franchisees as being “exclusive,” while reserving certain rights for the franchisor within the territory. However, the Federal Trade Commission (“FTC”) Staff recently issued FAQ #37, which clarifies the meaning of an exclusive territory.
As recently discussed in an article by Tom Pitegoff on the IAFD website, FAQ #37 indicates that a franchisor’s reservation of rights to sell through non-traditional venues located within a franchisee’s territory means that the territory cannot be defined as “exclusive.” As was already indicated in FTC Staff FAQ #25, an “exclusive territory” is a geographic area within which “the franchisor 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.” FAQ #37 goes beyond that. Even though sales made through non-traditional venues do not directly compete with traditional franchise venues, it appears that the FTC has moved toward a definition that would mean that any franchisor which reserves for itself the right to sell goods and/or services through non-traditional venues must define itself as granting a non-exclusive territory.
If you are a franchisor that freely describes your granted territories as “exclusive” without taking into account the clarification contained within FAQ #37, you run the risk of providing franchisees with a franchise agreement that is inconsistent with the requirements of the FTC Rule and which is, by definition, misleading. This can create real liability for a franchisor. Franchisors who have such agreements in circulation should consider amending them.