Item 12: Territory
Item 12 of the amended Rule, like the corresponding item of the UFOC Guidelines, requires detailed disclosures concerning assigned territories and applicable sales restrictions. Two important topics that must be covered in Item 12, among others, are:
- the conditions, if any, under which a franchisor will approve the relocation of the franchisee’s business and the franchisee’s establishment of additional outlets; and
- any present plans on the part of the franchisor to operate a competing franchise system offering similar goods or services.
In addition, if a franchisor does not offer an exclusive territory, Item 12 requires the franchisor to include a prescribed statement underscoring that point, and warning about the consequences of purchasing a non-exclusive territory; namely:
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.
Item 12 also mandates disclosures on several other specific topics relating to territories. Disclosures about the impact of technological innovation and new market developments must be included here. Specifically, Item 12 requires disclosure of information about the use of the Internet to achieve sales and the use of alternative channels for distributing a franchisor’s goods. These disclosures are required regardless of whether the franchisor provides an exclusive territory. In this regard, Item 12 requires a franchisor to disclose whether, under the franchise agreement:
- the franchisor itself can solicit or accept orders from consumers within a franchisee’s territory;
- the franchisor reserves the right to use alternative channels of distribution within a franchisee’s territory, including Internet, catalog, or telemarketing sales; and
- any compensation a franchisor pays to a franchisee for soliciting or accepting orders from inside the franchisee’s territory.
Finally, Item 12 calls for disclosure of similar information describing the extent to which a franchisee will be restricted from soliciting or accepting orders from outside his or her territory, including whether a franchisee has the right to distribute through alternative channels, such as the Internet, catalog sales, telemarketing, or other direct marketing.
This article is part of a series of articles on starting a franchise in Minnesota.
CREDIT: The content of this post has been copied or adopted from the Federal Trade Commission’s Franchise Rule Compliance Guide.