How Does Franchising Differ From Licensing?

Franchise2

When starting a new business in South Florida, you may be attracted to a licensing or franchising opportunity. Although these terms are often used interchangeably, they represent distinct legal concepts, and while franchising generally involves licensing, the reverse is not true.

What Does a License Do?

Licensing typically involves one person or business entity (the licensor) granting another party (the licensee) the right to use the licensor’s intellectual property in a limited capacity. A common example of licensing is a trademark owner permitting a retailer to sell goods carrying the trademark. In exchange, the trademark owner receives royalty payments, usually a percentage of sales.

Licenses may be exclusive or non-exclusive. With an exclusive license, the licensee has sole commercial rights to use the trademark. Conversely, with a non-exclusive license, the licensor is free to enter into multiple licensing agreements with different third parties.

If you are looking to enter into a licensing agreement, whether as the licensor or licensee, it is important that both parties understand the scope of the license. If the licensee mistakenly assumes that he or she has an exclusive license, it can lead to conflict down the line, and potentially litigation. The licensor should ensure they are adequately compensated for exclusivity rights.

What Is a Franchise?

As mentioned above, a franchise involves licensing. But it also implies a more extensive business relationship. In fact, a franchise has a specific definition under federal law. Federal Trade Commission regulations define a franchise as any business arrangement that satisfies the following three conditions:

  1. The franchisor agrees to “provide a trademark or other symbol” for the use of the franchisee;
  2. The franchisor promises to “exercise significant control or provide significant assistance in the operation” of the franchisee’s business; and
  3. The franchisor requires a “minimum payment of at least $500” from the franchisee during the first 6 months of the operation.

The term “significant control” in condition #2 can often cause confusion. According to the FTC, “the control or assistance must relate to the franchisee’s overall method of operation – not a small part of the franchisee’s business.” Therefore a royalty agreement to sell or promote trademarked products would not, on its own, create a franchise relationship. However, if the trademark holder controls any or all of the following areas of the licensee’s business, that would likely constitute a franchise:

  • The locations where the franchisee may operate;
  • The site and design of the franchisee’s locations;
  • The franchisee’s hours of operation; or
  • The franchisee’s production techniques, accounting practices, and personnel policies.

The FTC requires all franchisors to provide potential franchisees with a detailed list of disclosures regarding the terms of the franchise. As a franchisee, you may be entitled to monetary damages if a franchisor fails to comply with this rule. The State of Florida also has its own regulations governing franchises and business opportunities that apply to certain contracts.

SimplyLegal Can Help You With Franchising & Licensing

If you are contemplating licensing a franchise agreement, it is important to get expert advice from a qualified Miami business lawyer. Remember, these are business contracts that can significantly impact your legal rights. The attorneys at SimplyLegal can help. Call us today at (305) 858-6208 to schedule a complimentary consultation.

Source:

ftc.gov/enforcement/rules/rulemaking-regulatory-reform-proceedings/franchise-rule

Leave a Reply

Your email address will not be published. Required fields are marked *