Publications

Franchising is a popular method of distribution used by a wide variety of businesses. Franchising is attactive as a business model because it offers companies the prospect of expansion with a lower financial and overhead investment than establishing or acquiring a network of company-owned distribution points. In short, franchising leverages other people’s money, credit, and personnel to establish and operate new branded locations. Not coincidentally, franchising also happens to be regulated under federal law and the laws of approximately half the states. Unless an exemption exists, a franchisor must bear significant compliance expenses and adopt robust compliance procedures. For branded businesses interested in increasing distribution, a common reaction when faced with the prospect of complying with the franchise laws is to say that they will just “licence,” rather than “franchise.” While the goal of franchise avoidance may be simple, the execution is not.

With an awareness of the franchise laws and careful planning, licensors can attempt to structure licensing arrangements to avoid being deemed franchisors, depending on what features are important in their business model. Without an appreciation of the franchise laws, however, a licensor risks creating “hidden” or “inadvertent” franchises. This article provides an overview of why it matters if a license is deemed to be a franchise and briefly describes the franchise disclosure and registration scheme and franchise relationship laws. It discusses several cases to illustrate that distinguishing between licenses and franchises is not just an intellectual exercise, but has serious practical consequences. These cases also demonstrate how a license agreement may be uncovered as a “hidden” franchise years after its initial adoption and use. Finally the article reviews the definitional elements of what must be present to constitute a “franchise” and offers some advice on structuring a license to avoid falling under the franchise laws.