When it comes to expanding a business, what's the difference between franchising and licensing?
It boils down to semantics in the final analysis. When you put someone into business, which is done in franchising, the government will regulate that activity. The two regulatory frameworks that cover these situations 99% of the time are either the franchise laws or the business opportunity laws. It doesn't matter that you call the relationship a "license" or a "joint venture" or whatever. All that matters is the presence (or absence) of a very limited number of common elements. Both require preparing, and in many states filing, significant paperwork and documents with the appropriate regulatory agency before any advertising takes place. There's the federal FTC Rule that applies in all states to franchises and business opportunities. In California, there's also the CFIL (Calfornia Franchise Investment Law) for franchises and the Seller Assisted Marketing Plan (SAMP) for business opportunities. There's a good article about franchising vs. licensing and business opportunity ventures on the Franchise Foundations website (see the second link below). Before starting down any road, competent advice is critical. Fines and penalties for noncompliance are substantial.
Kevin B. Murphy, B.S., M.B.A., J.D.
This is a common question and an important issue that all entrepreneurs should be aware of when evaluating options respecting the expansion of their business. This issue was recently discussed on my blog at www.newyorkfranchiselaw.com. In the blog post we were discussing why a "license" was not a suitable alternative or model to avoid franchise regulation, i.e., to avoid franchise regulation, but nevertheless achieve brand growth, the entrepreneur (as a “licensor”) licenses his or her trade name and trademarks to third parties (known as “licensees”) who conduct their own business utilizing the licensed marks. [What follows is the substantive content of my blog post - I hope you find it helpful]
While “licensing” relationships, without question, possess a legitimate purpose, they are extremely limited and cannot serve as an “end-run” around franchise regulation. That is, license agreements cannot be used to create “franchise-type relationships” without the franchise regulation. The reason for this is simple: in the world of franchise regulation, “substance” matters more than “form”, labels do not matter and just because you call something a “license” does not mean that it is not a “franchise”. In short, your license agreement (no matter what you call it) may in fact be a franchise.
So, how do you determine if your license agreement “crosses the line”? You ignore titles such as “licensor”, “licensee”, “license fee” and “license agreement” and evaluate the “substance” of your business relationship. Under the federal Franchise Rule, the defining characteristics of a franchise include:
(1) Continuing Commercial Relationship. a “continuing commercial relationship”;
(2) Agreement. a written or oral “agreement”;
(3) License. the “license” of a trademark;
(4) Control / Obligation to Support. “significant control” over your “licensees/franchisees” methods of operation, or, an obligation to “support” those operations, and
(5) Fee. the payment of a “fee”.
Since, factors (1), (2) and (3) are, by necessity, inherent to both franchise and license agreements, the determination as to whether or not your license agreement “crosses the line” into franchise territory, boils down to an evaluation of “control” and “fees”.
Will you possess significant control over your “licensee’s” methods of operation, or, in the alternative, are you obligated to provide significant support to your “licensee’s” operations? and
Will you receive or be owed a fee as a condition for your “licensee” to commence its operations?
If the answer to both of these questions is “yes” or “possibly yes”, your “licensee” may actually be a “franchisee” and you may be subject to franchise regulation. When making this evaluation, you must go beyond labels and consider both the substance of the relationship that your are creating and the long-term goals that you are attempting to achieve.
If you allow your business name, service mark, or trade mark to be used for a fee, you are selling a franchise or business opportunity in most if not all states. There are no loopholes that allow expansion of a business through independent operators who pay money for the right. There is a difference between licensing (“franchising”) and dealer networks. Dealer networks are also regulated.
This is a complex area of the law that requires a legal professional.
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