Let’s get physical about exclusivity!

Published on: Author: Mary Beth Gettins Leave a comment

Per Item 12 of the Franchise Disclosure Document, Franchisors are required to state whether they offer exclusive franchise territories. An exclusive territory, as defined by the Federal Trade Commission (FTC) franchise rule, means that 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 within the geographic area or territory granted to a franchisee.”

The FTC has previously come out to say that franchisors may make a claim of exclusivity even if they:

• take catalog orders for products or service from customers within the territory, or

• contract with another company to complete internet sales within the territory, or

• telemarket to customers within the territory.

The FTC finds these activities to be “other channels of distribution.” Other channels of distribution, in the FTC rule, are not considered an infringement of a franchisee’s territory exclusivity rights. However, the FTC is coming out to say that not everything can be declared other channel of distributions. There must be a line were other channels of the distribution end and exclusivity begins.

That line is being drawn by a physical location. If the franchise reserves the right to open a physical location within the territory or if the franchisor allows another entity to open a location within the territory, the franchisor cannot claim exclusivity. This issue has come to the forefront with the introduction of “non-traditional venues.” Non-traditional venue includes such venues as open air malls, airports, amusement parks, and toll roads.

So say for example a franchisor offers a franchise for the Cincinnati territory, but reserves the right to open a location within the Cincinnati airport or at Kings Island. The franchisor (per the new FTC statement) cannot say the Cincinnati territory is exclusive.

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