While sharing certain similar characteristics, licenses and franchises are different relationships that, by law, must also have certain key distinctions. If you are considering a franchise or another business opportunity that involves a license, it is important to have at least a basic understanding of the unique features each type of relationship entails.
The Legal Definition of a Franchise
We’ll start by looking at the definition of a franchise. Under the Federal Trade Commission (FTC) Franchise Rule, a business relationship must have three essential elements in order to be deemed a franchise:
- The franchisee must receive, “the right to operate a business that is identified or associated with the franchisor's trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor's trademark;”
- The franchisor must “exert or ha[ve] authority to exert a significant degree of control over the franchisee's method of operation, or provide significant assistance in the franchisee's method of operation;” and,
- The franchisee must “make  a required payment or commit  to make a required payment to the franchisor or its affiliate,” as a condition to opening for business.
Certain states’ franchise laws include slightly-modified definitions, but they generally incorporate some variation of these same three key elements.
In order for a business relationship to constitute a franchise, all three elements must be present. So, what happens if one is missing?
In most cases, the would-be franchisee receives a license. The first element of a franchise (“the right to operate a business that is identified or associated with the franchisor's trademark…”) is the grant of a license. So, while all franchisees are licensees, the reverse is not true. There are many types of business arrangements in which one party grants the other a license to use its trademark, but one element of the franchise definition (typically the second element) is not present.
Be Wary of the Inadvertent or “Hidden” Franchise
If you are considering entering into a relationship or buying into a business opportunity that has been characterized as a license but not a franchise, one potential issue to be aware of is what is known as the inadvertent or “hidden” franchise. In short, this can become an issue if the licensor exerts a “significant degree of control” or provides “significant assistance” without self-identifying as a franchisor. While “hidden” franchising is often of greater concern to the inadvertent (or non-compliant) franchisor, it can have implications for franchisees as well.
These implications can be both negative and positive. Franchising is a highly-structured and highly-regulated industry, and a company that fails to follow the strictures of franchising may not necessarily be the best choice when entering into a long-term, restrictive relationship. On the other hand, state and federal laws provide additional protections to franchisees. So, if you are facing a dispute and you bought a “license” that is actually a franchise, you may be able to use these laws to your advantage.
Contact National Franchise Lawyer Jeffrey M. Goldstein
If you are considering a franchise or other business opportunity and would like to learn more about your rights, if you are facing a dispute with a licensor or franchisor, or if you need representation for any other franchise-related legal matter, contact the Goldstein Law Firm for a free consultation. To speak with franchise lawyer Jeffrey M. Goldstein in confidence, contact us online or call (202) 293-3947 today.