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FTC Tightens Rule on Franchisors' Exclusive Territories

WASHINGTON – The Federal Trade Commission has issued new guidelines as to how franchise companies define “exclusive territory” in their franchise disclosure documents to prospective buyers. When a franchisor grants a protected territory to a franchisee it must now mean just that. No outlets, franchised, company-owned or affiliate-owned, may open in that exclusive location. Otherwise, it is not exclusive.

Under the Franchise Rule, when franchisors do grant a protective location in which the franchisee operates its business, they are required to outline in Item 12 how the size of the location will be determined. If they do not offer an exclusive territory, the franchisor must provide that negative disclosure in its FDD.

While many franchise companies in the past granted protected areas they retained certain rights for themselves to conduct certain activities within the franchisee’s location. Those rights included opening “non-traditional venues” such as airports, hotels, casinos, theme parks, malls, schools, and military installations. Franchisors were required to explain thoroughly each of those exceptions in Item 12.

The Commission also requires the franchisor to provide a negative disclosure that warns prospective franchisees that they may face competition from other franchisees, outlets that the company owns, or other channels of distribution or competitive brands that the franchisor controls.

FTC states that its new guidance will directly affect a significant number of franchisors nationwide. It explains that most franchisors that do provide exclusive territories of any size typically will reserve the right to non-traditional venues within those territories. The Commission reasons that “because ‘non-traditional venues’ entail an outlet physically located in a franchisee’s territory,” the territory is not actually “exclusive” within the meaning of the Franchise Rule.

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