A. BUSINESSES COVERED BY FEDERAL TRADE COMMISSION FRANCHISE RULE
1. Two types of continuing commercial relationships are defined as a "franchise" and, thus, are covered by the FTC Franchise Rule.
a. Franchise (business format or product format) - three (3) elements:
b. Significant Control or Assistance. The FTC Franchise Rule Interpretive Guides sets forth nine examples of significant types of controls and five examples of significant promises of assistance over the franchisee's entire method of operation.
Significant Types of Control:
Significant Types of Promises of Assistance to the Franchisee's Method of Operation:
In addition to the above listed elements - the presence of any of which would suggest the existence of "significant control or assistance" the following additional elements will, to a lesser extent, be considered when determining whether "significant" control or assistance is present in a relationship:
The following elements are not considered in determining whether "significant" control or assistance exists:
c. Business Opportunity - three (3) elements:
d. Relationships covered by the FTC Franchise Rule include those which are within either definition of "franchise" and those which are represented as being within the definition when the relationship is entered into, regardless of whether, in fact, they are within the definition.
B. EXEMPTIONS AND EXCLUSIONS FROM THE FTC FRANCHISE RULE
1. Exempt Relationships.
2. Excluded Relationships.
C. DEFINITION OF "FRANCHISE" UNDER STATE LAWS.
1. It is possible to structure yourself to not be a "franchise" under the FTC Franchise Rule but you still may be a "franchise" under certain state laws because of a broader definition of "franchise" under state law.
a. The 15 state franchise disclosure laws define "franchise" in terms of a combination of three or four of six elements:
b. California, Illinois, Indiana, Maryland, North Dakota, Oregon, Rhode Island, Virginia, Washington and Wisconsin define a franchise as a combination in which the franchisee:
c. Hawaii, Minnesota and South Dakota define a franchise relationship in which the franchisee:
d. Michigan and New York each require:
2. Therefore, in structuring a business relationship to fall outside the definition of a "franchise," the FTC Franchise Rule must be reviewed as well as the laws of the state in which you intend to do business and the state of residence of the other person (franchisee).
D. THE ACCIDENTAL FRANCHISOR
Many types of business relationships may inadvertently become franchises because the elements of a franchise are present, notwithstanding the intention of the parties or the label of the relationship.
a. Definition. A distributorship/dealership is a marketing format whereby independent business persons take on certain wholesale ("distributor") and retail ("dealer") marketing, advertising, inventory, selling and/or servicing functions of a manufacturer to better promote and sell such manufacturer's products. A distributorship is generally characterized as a business relationship in which a distributor has the right to distribute products of a manufacturer or manufacturers. The distributor may carry a single line or multiple lines of one or more manufacturers who may be in competition with one another. A dealer is similar to a distributorship. The difference is that a dealership often obtains its products from a distributor rather than a manufacturer, and resells to the public from a retail outlet rather than to other dealers from a wholesale outlet. These descriptions are somewhat simplified; in practice, elements of distributorships and dealerships may be combined in a business relationship. Further, these labels are often used interchangeably.
b. Pitfalls. To avoid being a franchise several things may be considered such as:
2. Trademark Licenses.
a. Definition. A license is the right of a person ("licensee") to use, for the payment of a fee and/or royalty, a patent, trademark, trade name, service mark or copyright owned by another ("licensor") in connection with the manufacture and/or sale of a product or rendition of a service.
b. Pitfalls. Two of the elements of a franchise (use of a trade name and payment of a fee) are usually present. However, the licensor usually does not provide a marketing system or plan in connection with the product or service for which the trademark is licensed. There is a "twilight zone" between a licensor "policing" its trademark and providing significant assistance and/or control of the licensee.
3. Partnerships and Joint Ventures.
a. Definition. A partnership is an association of two or more persons to carry on a business for profit as co-owners. A joint venture is a partnership organized to carry out a limited or specific purpose. Sometimes there are two companies involved at the same or at different levels of the value chain (e.g., capital/labor; manufacturer/retailer) whereby there may exist certain synergies in working together either as a joint venture or as a partnership.
b. Pitfalls. While a joint venture or a general partnership is excluded from the definition of a franchise under the FTC Franchise Rule, where a company (franchisor) develops a partnership (holding its partnership interest in a subsidiary or affiliated corporation) for each outlet of distribution, contributes a license of its trade name and marketing plan and receives any fee (e.g., training) the relationship may be considered a franchise.
Where the employer requires the employee to "invest" in the outlet of distribution in which the employee will manage and share in its profits, the arrangement may be considered a franchise.
The use of forming a corporation for each outlet of distribution owned jointly by the person contributing a license of its name and market plan and a person contributing money and his or her labor will not fall within the general partnership exemption and may be considered a franchise.
6. Sale of Business.
Generally, the sale of business including the name of the business is not a sale of a franchise. If the seller retains ownership of the name and merely licenses or permits the buyer to use the name and offers the buyer a marketing plan or significant assistance or control after the sale, the sale may be considered a sale of a franchise.
7. Sales Representative.
a. Definition. A sales representative is a person acting as an independent contractor to sell goods or services on behalf of a manufacturer or distributor. Usually, the sales representative pays no fee to become a representative, does not take title to the goods and does not operate under the manufacturer's or distributor's trade name.
b. Pitfalls. If the sales representative sells or distributes products under a marketing plan prescribed by the manufacturer, uses the manufacturer's trade name and paid the manufacturer a fee for the right to engage in business, the relationship may be considered a "franchise."