Intellectual property licensing, distribution and collaboration agreements are widely used to expand businesses and reach new markets. While they offer flexibility, they carry a frequently overlooked regulatory risk. Depending on how rights, support and payments are structured, these agreements may be characterized as franchises by courts or regulators.
In the United States, a license may be treated as a franchise when certain factual elements are present. In Brazil, a relationship that operates as a franchise may be recognized as such even without compliance with the formal requirements of the Franchise Law, exposing the parties to contract nullification, restitution of amounts paid and damages.
In the United States, under the FTC Rule (Federal Trade Commission Franchise Rule), an arrangement is a franchise if three elements coexist: the operator conducts a business identified with the trademark owner's brand; the trademark owner exercises significant control over the method of operation or provides significant assistance; and the operator is required to pay at least US$500 within the first six months. The FTC interprets "payment" broadly, encompassing any consideration required to obtain or commence operations.
In addition to the federal rule, several states apply their own definitions. Some mirror the FTC test with variations, while others replace the "control/assistance" element with concepts such as a prescribed marketing plan. States applying "two-element tests" may classify a relationship as a franchise based solely on a fee combined with trademark use.
In Brazil, Law No. 13,966/2019 defines a franchise as a system in which the franchisor authorizes the franchisee to use its trademarks and intellectual property to produce or distribute products or services, adopting the franchisor's operational methods, in exchange for direct or indirect remuneration. The law requires the Franchise Disclosure Document (Circular de Oferta de Franquia – COF), in Portuguese, to be delivered at least 10 days prior to any signing or payment.
Brazilian courts treat franchise characterization as a combination of formal and factual elements. The presence of trademark use, transfer of know-how, operational standardization and structured support in exchange for remuneration points to the substance of a franchise, regardless of the contractual label. The absence or defect of the COF does not prevent the relationship from being treated as a franchise; rather, once the franchise substance is identified, the agreement becomes vulnerable to nullification, restitution and damages.
Brazilian courts have already addressed the issue. The Superior Court of Justice (STJ), in Special Appeal No. 1.602.076/SP, made it clear that franchises are business relationships — not consumer relationships — even when the franchisee has limited bargaining power. The São Paulo Court of Appeals (TJSP), in Appeal No. 0021687-37.2017.8.26.0196, disregarded the "trademark license" label and treated as a franchise an agreement in which the licensor dictated layouts, uniforms, suppliers and provided structured training.
In both jurisdictions, certain patterns can be observed in case law. Agreements that protect the brand but avoid prescribing the partner's business model tend to remain within the territory of licensing or distribution. Agreements that monetize know-how and support tend to fall within the franchise space. Courts examine operational reality, not merely well-intentioned clauses. Emails, manuals, advisory visits and day-to-day practices often carry more weight than contractual disclaimers. In both countries, alignment between contractual language and day-to-day operations is essential.
Operating a franchise-like system without complying with applicable requirements may generate significant exposure. In the U.S., companies may face FTC investigations, civil penalties, injunctive relief and private actions under state franchise and unfair practices laws. In Brazil, a franchise relationship with a defective COF may lead to contract nullification, restitution of all amounts paid and damages. Pre-execution risk analysis and compliance review have increasingly been valued by the market.
In short, licensing and distribution structures may inadvertently fall under franchise regulation when contractual terms or daily practices mirror elements that regulators and courts consider indicative of a franchise. Labels alone offer no protection. In the U.S., companies must ensure that trademark use does not coexist with significant assistance or mandatory fees within the first six months. In Brazil, the absence of a COF does not prevent a franchise finding; it only aggravates the consequences. When the business model genuinely requires brand-driven standardization, transfer of know-how, training and ongoing support, the safest and most efficient path — in both Brazil and the United States — is to assume franchise status and fully comply with the applicable regulatory frameworks.
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