Item 16 of the Franchise Disclosure Document: Restrictions on What the Franchisee May Sell

Item 16 of the Franchise Disclosure Document (FDD) requires disclosure of the restrictions on the goods or services that a franchisee may sell in the franchised business, as set forth in the franchise agreement. Because uniformity of customer experience is a virtue in franchising, nearly all franchise agreements impose some form of limitation on the goods and services a franchisee may offer and sell from its business. Therefore, while Item 16 is one of the shorter Items in the FDD, it is a critical Item that prospective franchisees look to when deciding whether to invest in the franchise system. Our attorneys could provide more information on the requirements of Item 16 of the FDD as well as explain how to best present this information. 

What is Required in Item 16?

The disclosure requirements for Item 16 codified under 16 C.F.R §436.5(p). Under Item 16, a franchisor must disclose any limitations in the franchise agreement that restrict the goods or services that a franchisee may offer in its franchised business, as well as any limitations that restrict a franchisee’s access to certain customers.

Restrictions on offering competing goods or services, or products that are not part of the franchise system, are common examples of restrictions that must be disclosed under Item 16. Within the general disclosure requirement discussed above, the FTC Rule additionally requires that at these three specific disclosures be made under Item 16:

• Whether the franchisee may sell only goods or services approved by the franchisor;
• Whether the franchisee must sell all goods or services authorized by the franchisor; and
• Whether the franchisor has the right to change the types of authorized goods or services that franchisees are required to sell and, if so, whether there are any restrictions on the franchisor’s right to make such changes.

Tips for Drafting Item 1 of the FDD

As evidenced by its title, Item 16 fairly limited and straightforward. Franchisors should be cognizant to present the information under Item 16 in a way that does not appear as if the franchisor is excessively restricting the franchisee’s ability to run its business. Therefore, in drafting the disclosures under Item 16, it is wise for a franchisor to highlight how the restrictions placed on the goods and services a franchisee may sell ultimately helps the franchise system maintain uniformity, as well as any other benefits that these restrictions have for the entire franchise system. Consulting with a seasoned franchise attorney is ultimately the best way for a franchisor to ensure that the information required under Item 16  of the franchise disclosure document is properly disclosed and painted in a light that attracts prospective franchisees to the brand.