Understanding the FDD
Item 12: Territory

By Mario Herman

The foundation of a successful franchise will often rest upon the franchisee territory and the rights that come with that territory. Prospective franchisees need to fully understand the information that a franchisor is obligated to provide in the FDD regarding the territory.

A franchisor is required to disclose, under Item 12 in the Franchise Disclosure Document, the following information with respect to Territory:

(1) Whether the franchise is for a specific location or a location to be approved by the franchisor.

(2) Any minimum territory granted to the franchisee (for example, a specific radius, a distance sufficient to encompass a specified population, or another specific designation).

(3) The conditions under which the franchisor will approve the relocation of the franchised business or the franchisee’s establishment of additional franchised outlets.

(4) Franchisee options, rights of first refusal, or similar rights to acquire additional franchises.

(5) Whether the franchisor grants an exclusive territory. If the franchisor does not grant an exclusive territory, the franchisor must state:

‘‘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.’’

(6) For all territories (exclusive and non-exclusive) a franchisor must disclose:

(i) Any restrictions on the franchisor from soliciting or accepting orders from consumers inside the franchisee’s territory, including:

(A) Whether the franchisor or an affiliate has used or reserves the right to use other channels of distribution, such as the Internet, catalog sales, telemarketing, or other direct marketing sales, to make sales within the franchisee’s territory using the franchisor’s principal trademarks.

(B) Whether the franchisor or an affiliate has used or reserves the right to use other channels of distribution, such as the Internet, catalog sales, telemarketing, or other direct marketing, to make sales within the franchisee’s territory of products or services under trademarks different from the ones the franchisee will use under the franchise agreement.

(C) Any compensation that the franchisor must pay for soliciting or accepting orders from inside the franchisee’s territory.

(ii) Any restrictions on the franchisee from soliciting or accepting orders from consumers outside of his or her territory, including whether the franchisee has the right to use other channels of distribution, such as the Internet, catalog sales, telemarketing, or other direct marketing, to make sales outside of his or her territory.

(iii) If the franchisor or an affiliate operates, franchises, or has plans to operate or franchise a business under a different trademark and that business sells or will sell goods or services similar to those the franchisee will offer, the franchisor must describe:

(A) The similar goods and services.

(B) The different trademark.

 (C) Whether outlets will be franchisor owned or operated.

(D) Whether the franchisor or its franchisees who use the different trademark will solicit or accept orders within the franchisee’s territory.

(E) The timetable for the plan.

(F) How the franchisor will resolve conflicts between the franchisor and franchisees and between the franchisees of each system regarding territory, customers, and franchisor support.

(G) The principal business address of the franchisor’s similar operating business. If it is the same as the franchisor’s principal business address stated in § 436.5(a) of this part, disclose whether the franchisor maintains (or plans to maintain) physically separate offices and training facilities for the similar competing business.

Item 12 includes a great deal of information regarding a prospective franchisee’s territorial rights and restriction. It is important that this information is understood and carefully drafted to protect your rights. If your franchise agreement does not include an exclusive territory, or contains exceptions to your exclusive territory that you did not expect, you will have little hope of recourse against your franchisor after a dispute arises. You should consult an experienced franchisee law attorney to assist you in reviewing the territorial provisions of the franchise agreement prior to signing. You need to clearly explain to the franchisee law attorney what your expectations are with regard to territorial rights and restrictions. If they differ from what the franchisor has drafted, an experienced franchise law attorney may be able to assist you in negotiating these clauses. Remember, the time to do this is before you sign an agreement with the franchisor.

Mr. Herman based in Washington, D.C., represents franchisees domestically and internationally negotiation, mediation, arbitration, and litigation.

mherman@franchise-law.com
www.franchise-law.com
www.internationalfranchiselaw.com
202-686-2886 (ph)