There are significant consequences for a relationship being
characterized as a franchise. One of the biggest consequences is
the right of the "franchisee" to rescind the contract for
2 years if it was not given proper disclosure. Franchisors are
aware of the obligations and act accordingly. Accidental
franchisors, on the other hand, may not even be aware that
franchise disclosure legislation applies to them. A person granting
others the right to distribute the person's goods or services
could find itself as an accidental franchisor.
The intention of the disclosure legislation is to have a broad
definition of franchising; as a result, manufacturers or trademark
owners may discover that their business dealings, unbeknownst to
them, fall within the definition of a franchise. A franchise will
exist if all of the following 3 elements are present:
a payment is made by the franchisee to the franchisor;
the franchisor grants the franchisee the rights to the
franchisor's goods or services; and
where the distribution right:
a. is accompanied by a right to use the franchisor's
trademarks, the franchisor exercises significant control over, or
offers significant assistance in, the franchisee's method of
operation, including building design and furnishings, locations,
business organization, marketing techniques or training; or
b. the franchisor provides location assistance (which includes
securing retail outlets or accounts for the goods or services to be
A manufacturer who provides sales leads to its customers might
be seen as providing location assistance, and therefore meeting the
criteria for being a franchisor. More troublesome may be a
trademark holder who licenses others the rights to use its
trademarks. In order to protect the image of the trademark, it is
common that rules be imposed on how those trademarks are used. If
those rules are viewed as the exercise of control over method of
operation, then the trademark holder will be a franchisor.
A recent case may give comfort to trademark holders that they
will not be franchisors. In MGDC Management Group v. Marilyn
Monroe Estate, the Estate granted MGDC a license to use the
Marilyn Monroe trademark to create and operate Marilyn
Monroe-themed restaurants. The license agreement gave the Estate
the right to veto designs and business methods that MGDC might
employ in its use of the trademark, and MGDC were the ones
responsible for developing and operating their restaurant
Although the case was determined on the basis of an exemption
from the application of franchise disclosure legislation (i.e. an
arrangement arising from an agreement between a licensor and a
single licensee to license a specific trade-mark, where
such licence is theonly oneof its general nature and type to be granted by
the licensor with respect to that trade-mark) it was observed that
trademark licenses are not franchise agreements.
The veto rights could have been interpreted as significant
control over building design, but the judge did not see the veto
rights given to the Estate as significant control or significant
assistance by the Estate over MGDC's method of operating its
business. The judge distinguished between control and protection of
Reference was made to Di Stefano v Energy Automated Systems
Inc. That case made it clear that "training" will
not be the provision of significant assistance, if the training is
about the product and does not relate to "method of
In summary, not all veto rights on image and not all training is
considered sufficient "assistance in, the franchisee's
method of operation" to create a franchise relationship.
Grantors of trademark licenses or granters of distribution
rights should consider how extensive their rights need to be to
protect their intellectual property. Protecting their intellectual
property and ensuring that their products are used properly will
not create a franchise unless the rights reserved stray away from
product knowledge, or restraints on how their image is portrayed.
The bottom line is grantors of trademark licenses and distribution
rights who do not want to be franchisors should not interfere with
how the rights recipients carry on their businesses.
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.
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A recent Saskatchewan Court of Queen's Bench decision allowed a court-appointed receiver to sell and transfer intellectual property rights free and clear of encumbrances, finding that a license to use improvements of an invention was a contractual interest and not a property interest.
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