Franchise law is a set of laws that govern the relationship between a franchisor and a franchisee. It covers the rights and obligations of both parties, as well as the terms and conditions of the franchise agreement. Franchise law also covers the disclosure of information to potential franchisees, the transfer of the franchise, and the termination of the franchise agreement.
I often have potential clients who have tried to avoid franchising due to its cost and complexity by entering into a “license agreement.” A franchise is a type of license agreement so, unfortunately, these individuals may have unintentionally violated the Federal Trade Commission’s Franchise Rule. While unintentional, the client has violated the federal and often state laws and should seek to resolve these issues.
The franchise rule defines a franchise as a continuing commercial relationship created by any arrangement where (1) the franchisee sells goods or services that are associated with the franchisor’s trademark or must meet the franchisor’s quality standards, (2) the franchisor exercises significant control over, or gives the franchisee significant assistance in, the franchisee’s method of operation, and (3) the franchisee, as a condition of obtaining or commencing operation, is required to make payments aggregating more than $500 within six months of commencing such operation.
What constitutes significant control or assistance under the regulation depends in large part on how reliant the franchisee is on the expertise of the franchisor to reduce its business risks or enhance its chances for success. The significant controls over operations include those involving site approval, hours of operation, production techniques, personnel policies, accounting practices, advertising and promotional campaigns, and location or sales area restrictions. Significant promises of assistance include formal training programs, the establishment of accounting systems, the selection of site locations, and the provision of a detailed operating manual.
There are a number of exemptions to the franchise rule that may be available to you. Our practice includes assistance in complying with the franchise laws or seeking exemptions to it.