WHAT EVERY LAWYER SHOULD KNOW ABOUT FRANCHISE LAW – Part 1

Too often, expansion-minded business owners opt for a strategy offering trademarked products or services through licensing arrangements or distribution or dealership systems only to discover, well into the game, that what they have really done is turn themselves into franchisors—“accidental franchisors,” maybe, but franchisors nonetheless.

This is good news for the entrepreneur who runs a sophisticated business operation capable of meeting the many punctilios of California franchise law. It is bad news for the entrepreneur who doesn’t. In fact, it can spell disaster for the unwitting entrepreneur who steps over the fine line that separates franchising from other commercial arrangements involving trademarked goods or services.

REGULATORY THREAT TO FRANCHISING

Regulators across the country are taking the position that the franchise providers of janitorial, security guard, industrial gardening, delivery and other services to commercial clients who sign on as “unit franchisees” under master franchisees, are really employees of the master franchisees. Laws vary from state to state. California uses “substantially associated” as one criteria.

As to what makes one business “substantially associated” with another, the test is whether a business uses another’s trademark to identify its business

FRANCHISE APPRAISALS

Whatever the details of the particular relationship with the franchisor and the franchisee, the task for the appraiser is to discover the degree to which each asset contributes to the success of the operation as a whole – a task more easily said than done.

The process begins with an understanding of the franchise relationship as defined in state law.

Franchise or License Agreement? Part 2

As I talked about last week, a simple test determines whether the franchisee’s business is substantially associated with the franchisor: If the former uses the latter’s trademark to identify its business, it is substantially associated with it.

Business relationships that do not satisfy the outlined conditions may be licensing arrangements, distributorships, dealerships, or any one of a variety of other business arrangements, but the distinctions between these arrangements and franchise operations are also subtle and sometimes treacherous.

FRANCHISE AGREEMENT OR LICENSING AGREEMENT?

What’s the difference between a franchise arrangement and a licensing agreement?

Both can spur growth, but there’s a fine line between them, and the unwary entrepreneur launching an expansion campaign can end up in a world of trouble if he or she doesn’t understand the difference.

THE UNWITTING FRANCHISOR

Thinking of expanding your business via some sort of licensing arrangement, or perhaps by finding distributors or dealers for your trademarked product or service? Stop yourself before you go too far, because the last thing you want to do is to become an unwitting franchisor – and it’s probably more easily done than you think.