License vs. Franchise

The term “franchise” is a legal term, defined by the Federal Trade Commission’s Franchise Rule as:

“any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:

  1.  The franchisee will obtain 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;
  2. The franchisor will exert or has 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
  3. As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment to the franchisor or its affiliate.” 

In other words, the term “franchise” includes trademark licenses, distributorship, and other arrangements (regardless of what names they are given) if the trademark owner also has the right to exert a significant degree of control over the franchisee’s method of operation, or promises to provide significant assistance in the franchisee’s method of operation.

While it may be possible to license a trademark or business system, (a) provisions such as the right to approve a site for the business, impose site design or appearance requirements, dictate hours of operation, or require licensees to participate in promotional campaigns would be considered “significant control” over a licensee’s method of operation, and (b) promises to provide business training, site selection assistance, a systemwide website, and/or an operations manual would be considered “significant control or assistance” in the licensee’s method of operation.

Including any of these provisions, therefore, would cause the license agreement to be deemed a “franchise” for legal purposes, triggering application of federal and state franchise laws, regardless of the name given to the arrangement.