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.

In fact there is a fine line between a franchising operation and such other commercial arrangements as licensing agreements, distributorships and dealerships involving trademarked goods or services, and if you step over that line, you court a world of trouble.

By definition, under California law you are a franchisor if you offer, sell, or distribute goods or services through one or more “substantially associated” business enterprises following a marketing plan “prescribed in substantial part” by you in exchange for a fee, whether collected directly or indirectly, from those enterprises.

As to what makes one business “substantially associated” with another, the test is simple: If one uses the other’s trademark to identify its business, it is substantially associated with it.

You may also be a franchisor if you allow the associated enterprise to use your trademark and you:

• Provide the associated enterprise with advice and training with respect to your product or service, or

• Retain significant control over the conduct of the associated enterprise, or

• Grant it exclusive territory rights, or

• Require it to purchase or sell a specified quantity of your goods or services.

Clearly, whenever any business enters into an agreement with another for the sale or distribution of trademarked goods or services, the first item on the agenda is to determine whether the agreement is a franchise arrangement.

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