All too often, trademark licensors offer the use of their mark along with other intangibles without considering if the trademark license is actually an "unintended" offer of a sale of a franchise. Such action can be highly problematic because the offer and sale of franchises in the United States is highly regulated under both federal and state law.
FEDERAL LAW
The Federal Trade Commission (the "FTC") has a longstanding rule governing the sale of franchises (the "FTC Rule"). The FTC Rule defines a "franchise" as any "continuing commercial relationship" that includes the following three elements, regardless of what that relationship may be called:
1. Trademark: The franchisee is allowed to offer, sell or distribute products or services that are identified by a trademark, service mark, trade name, advertising or other commercial symbol owned by the franchisor; and
2. Significant Control or Assistance: The franchisor exerts significant control over or provides significant assistance to the franchisee in its operation of the business; and
3. Fee or Payment: The franchisee is required to pay a fee to the franchisor of $500 or more at any time before or within six months after commencing operation of the business (other than for the bona fide wholesale purchase price of inventory for resale).
If a business relationship falls within the definition of a "franchise," and no exemption is available, the franchisor must deliver to the prospective franchisee a prescribed form of disclosure document, known as an "FDD." FDD's are generally highly detailed documents that contain basic information about the franchise and the franchisor's well being.
It is important to remember that, because the FTC Rule is federal law, it applies to the sale of franchises in all fifty states and in U.S. territories, regardless of whether those states or territories have their own franchise laws.
STATE LAW
The FTC Rule does not restrict the right of the states to adopt their own franchise laws and regulations, provided that they are no less stringent than the FTC Rule. Some, but not all, of the states have adopted such laws and regulations. Although the definitions of a "franchise" employed by the states often resemble the federal definition (the state definitions usually involve a trademark element, a marketing element and a payment element) the state definitions of a "franchise" may be broader than that found in the FTC Rule and often extend to forms of business relationships that embrace a wider variety of dealerships, distributorships, and licensing arrangements.
The requirements imposed by the various states range from full registration, including a review of and comment on the franchise disclosure document and license agreement, to "notice states" that require only the filing of a notice of intent to offer and sell franchises in that state.
CONCLUSION
Failure to comply with franchise registration or relationship laws exposes an unintended franchisor to substantial risks of civil and criminal liability, as well as, in some cases, even personal liability. Therefore, parties who enter into any trademark "license," should be mindful of federal and state franchise law and seek to: (i) comply fully with such laws; (ii) structure the transaction to fall outside the definition of a "franchise;" or (iii) consider the fact-specific exceptions to the franchise disclosure and/or registration requirements available under state and federal law. Being an "unintended franchisor" often is an unwelcome surprise to trademark licensors. Therefore, careful consideration of possible franchise issues at the initial contemplation a trademark license can avoid many headaches and much heartache later on.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
