What is a Franchise?
Generally, a franchise is any business relationship, represented by a contract, which need not be in writing, that contains three essential elements: (1) the right to enter into or continue in a business that is substantially associated with a trademark owned or controlled by the franchisor; (2) payment, or agreement to pay, any fee for that right or for any services by the franchisor in connection with the business; and (3) the business is operated or to be operated under a marketing plan (or control) provided by the franchisor. A marketing plan can include any mandatory or recommended assistance in any aspect of operating the business.
Be aware of state differences.
At least twenty states have statutes that define what constitutes a franchise. There are important, nuanced differences between states. If you are selling franchises, you have to comply with the laws of any state your prospective franchisee resides in and any state in which you permit them to conduct business. If you are a franchisee, you may have the benefit of rights under the laws of the state you live in and the states in which you do business. You should consult with your franchise lawyer before offering, selling, or investing in a franchise to fully understand the laws that affect you and your business.
Unintended franchises.
There is an old saying that, if it walks like a franchise and talks like a franchise, it is a franchise. If a business relationship has all of the elements of a franchise as set forth in one or more of the state laws, it is a franchise, and naming it something else does not avoid the obligation to comply with the franchise laws. Frequently, we see documents, sometimes prepared by attorneys, that are entitled “License Agreement” or “Joint Venture Agreement” or even “Partnership Agreement”. If those documents contain the elements of a franchise, it is a franchise, and that carries serious legal consequences. An experienced franchise attorney can help you understand or avoid those legal consequences, or assist you in complying with registration and disclosure requirements. Bundy & Fichter PLLC can help you.
How to avoid violations.
The most basic place to begin analyzing whether a business relationship constitutes a franchise is to determine whether one party is granting the other party the right or privilege to use a trademark they own or control. That grant or permission can be in a written document, a verbal arrangement, or even the unwritten and unspoken conduct of the parties. Including a disclaimer saying that the relationship is not a franchise only makes matters worse. The presence of permission to use a trademark is not the end of the analysis, but it should trigger the parties, and particularly the trademark owner, to consult with experienced franchise counsel so you know whether you have to comply with the franchise disclosure and registration requirements. The lawyers at Bundy & Fichter PLLC would be happy to help you. Please contact us.