Franchising can be a great way for a small business to expand quickly while sharing some of the risks and capital investments. Franchises, however, are subject to a confusing array of government regulations and requirements. Even if you don’t think of yourself as a franchisor, if you’re licensing your trademarks to a third party, there’s a chance you might fall within these franchise and business opportunity laws.
Saper Law Offices has drafted the following FAQ to help you determine if your business is licensing illegal franchises, and, if so, how to comply with the relevant government regulations. If you have any questions, just call us: 312.527.4100
Who regulates franchises?
The federal government regulates franchises through the Federal Trade Commission (FTC). In addition, about 20 states have either a franchise law or a business opportunity law that will affect franchises offered within those states.
What is a franchise?
What constitutes a franchise varies from jurisdiction to jurisdiction. Generally, though, a franchise relationship arises where a party: (1) pays a fee; (2) is granted a trademark license; and (3) is subject to a certain amount of control in its business operations.
How much control is necessary to turn a “licensee” into a “franchisee”?
Figuring out whether a fee is paid or a trademark license is granted is usually pretty clear-cut. The third element is the tricky one, and it varies by jurisdiction.
One of three standards is usually used: (1) the FTC looks at whether a significant degree of control is exerted or a significant degree of assistance is offered ; (2) certain states, including Illinois, look at whether a marketing plan is prescribed; (3) a few other states look at whether there is a “community of interest” between the parties.
Listed below are some questions to help you determine whether your trademark license is actually a franchise. If you find yourself answering “yes” to a significant number of the questions below, then you probably need to comply with franchise law regulations.
Do you exert a significant degree of control over or provide a significant degree of assistance to your licensees? (FTC rule)
- Do your licensees rely on your superior business expertise to reduce the risks of their enterprise and to increase their probability of success?
- Do you approve the site of your licensees operations?
- Do you exercise control over (or offer assistance with) site design or appearance?
- Do you specify a specific area of operation for your licensees?
- Does you exercise control over licensees’ hours of operation?
- Does you exercise control over licensees’ sales techniques?
- Does you exercise control over licensees’ accounting practices?
- Does you exercise control over licensees’ personnel policies?
- Are licensees required to participate in your promotional campaigns?
- Do you place restrictions on what customers can be served by licensees?
Do you prescribe a “Marketing plan” for licensees? (rule in CA, IL, NY, MI, WI, etc.)
- Do you specify the prices charged by licensees?
- Do you prescribe special pricing schemes or discount plans?
- Do you mandate any sales quotas?
- Do you mandate the use of particular sales or display equipment or merchandising devices?
- Do you teach licensees specific sales techniques or mandate their use?
- Do you prescribe certain advertising or promotional materials?
- Do licensees cooperate in your advertising efforts?
- Do you provide licensees with formal operations or management training?
- Do you provide licensees with operational guidelines or assistance? Managerial guidelines or assistance? Technical guidelines or assistance? Financial guidelines or assistance?
- Do you exercise control over any of the following: lighting? employee uniforms? hiring?
- Must licensees purchase goods from a certain source?
- Must licensees follow an operating plan, standard procedure, or training manual? If they don’t, can you do anything about it?
Is there a community of interest between the parties? (rule in HI, MN, and SD)
- Do licensees derive a significant amount of their gross proceeds or profits from your goods or services?
- Are licensees required to make significant investments (in equipment, facilities, training, etc.) that would be useless if you terminated their license?
- Are licensees required to purchase a certain amount of goods from a particular source?
- Must licensees submit sales reports?
Attorneys at Saper Law can help you answer these questions and assist you with drafting either a trademark licensing agreement or assist you with the myriad of disclosure documents required to register a Franchise. Call us today: 312.527.4100