A franchise is, at its core, a licensing
agreement.
So what morphs a commonplace licensing agreement
into a franchise?
A
license becomes into a franchise when:
(i)
One grants another the right engage in a
business;
(ii)
Using the grantor’s brand identification (e.g. logo, registered or unregistered
trade/service mark, or advertising);
(iii)
Subject to the grantor’s significant control or
assistance (such as a training program or coaching); and
(iv)
The grantee pays more than $500 to enter into or
continue the relationship.
While
all the above elements are necessary, the grantor’s significant control or
assistance and the use of common branding are what usually push a licensing agreement
into being a franchise. When evaluating a licensing program, consider whether
the above elements actually create a franchise out of the licensing agreement
you are reviewing.
If It Is is a Franchise, Federal and
State Franchise Laws Apply.
The Federal
Trade Commission’s (“FTC”) Franchise Rule applies in all 50 states and many
states have state-specific franchising rules.
The most fundamental rule requires the preparation and delivery of a
Franchise Disclosure Document containing hundreds of pages of required
disclosures that must be given to the potential buyer within a specified time. State and FTC enforcement of these rules can
be harsh. Fines, refunds, buybacks, and
awards of attorney’s fees are routine if a Franchise Disclosure Document is not
prepared or delivered as required.
When Do State Franchising Laws Apply?
These
state laws may be triggered if any the following occurs in a state:
(1)
The offer originates, is received, or is
accepted in the state;
(2) Meetings
between the franchisor and prospect occur in the state;
(3) The
franchise business location will be operated in the state or any part of the
territory will be in the state; or
(4)
The prospect is a state resident.
Consider
this example: North Dakota resident meets Colorado franchisor (your client) at
a trade show in California. The North Dakota resident later accepts the offer
to buy a your client’s franchise, the territory of which will be located in
Washington.
This
example could require your client’s compliance with four sets of franchising
laws: North Dakota, California, and Washington state-franchise law, in addition
to federal franchise law that applies everywhere. Note that Colorado does not
have its own state-specific franchise laws.
Take Away Points: Discuss licensing
agreements carefully with your client (or your lawyer if you're the client) to discover if the business model may
implicate a franchise based on the above elements. Frequently, there are strong
business reasons to expand the business through franchising, namely the influx
of someone else’s capital into the business. If you are unfamiliar with the
franchising laws, consult with a franchise attorney when evaluating or
structuring a potential licensing or franchising program to make sure the
program and documents are done correctly.
