What is a Franchise

dreamstime xs 30100723 150x150 What is a FranchiseA “franchise” exists whenever a business relationship fits the legal definition of “franchise.” In other words, it does not matter whether the parties intend to have a franchise relationship, or if they describe the relationship using words such as “license” or “distributorship.”

The FTC’s Amended Franchise Rule defines a franchise using a three part test: (1) a trademark, (2) significant control or assistance, and (3) payment. Specifically:

“Franchise” means 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 or commits to make a required payment to the franchisor or its affiliate.

However, the Amended Franchise Rule also provides that a franchisor is exempt from complying with the federal regulations if certain conditions apply, such as fractional franchising or purely oral agreements.

Among states which have franchising laws, the definitions of “franchise” are mostly similar to the federal definition, but are not exactly the same. It is entirely possible for a business arrangement to be a “franchise” under a particular state’s law and yet not be subject to the FTC’s Amended Franchise Rule.

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