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.

Indeed, because some licensing agreements may in fact be franchise arrangements even if the parties intended to establish some other kind of relationship, you must step carefully if you don’t want to become an unwitting franchisor facing serious and potentially painful consequences because you didn’t follow complex areas of both federal and state franchise law.

Under California law, a franchise exists between the owner of an identifying trademark and the operator of a business using the trademark when:

• The franchisee engages in offering, selling or distributing goods or services under a marketing plan or system “prescribed in substantial part” by the franchisor;

• The franchisee’s business is “substantially associated” with the franchisor; and

• The franchisee pays a fee to the franchisor or to an affiliated party, directly or indirectly, in order to engage in business.

The first of these conditions exists when the franchisor:

• Provides the franchisee with advice and training;

• Retains significant control over the conduct of the franchisee’s business;

• Grants the franchisee exclusive territory; or

• Requires the franchisee to purchase or sell a specified quantity of the franchisor’s goods or services.

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.

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