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What makes the license a franchise in disguise?

Forest Hills, NY |

I would like to know exactly what makes the license a franchise in disguise? Please be as detailed as possible. Thanks.

*UPDATE*: So basically by just asking money and giving some advice on how to service the customer is already making the license a franchise in disguise right?

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Attorney answers 4

Best Answer

If you search Google for "accidental franchise" you'll find your answer.


A franchise always contains a license, but a license is not always a franchise. Under the Federal Trade Commission Rule, a business relationship will be a franchise, regardless of the name used, if it has three components: a trademark; exercise of substantial control or the offer of assistance by the franchisor; and the payment of more than $500 within the first 6 months of operation. Certain states(13) have slightly different defintions, with some requiring a fee of only $100.


A license agreement is an illegal franchise in disguise when certain key defining elements are present. There is an excellent article about this topic on the Franchise Foundations website. The bottom line in most of these cases is when someone is allowed to enter a business and use a brand name, that activity is regulated either as a franchise (most often) or as a business opportunity. Either way, an extensive disclosure document is required. Depending on the state(s) involved, there is also a registration - regulatory review process. Failure to observe these requirements leads to extensive liability.

Kevin B. Murphy, B.S., M.B.A., J.D. - Mr. Franchise


You have received some good basic franchise law answers. One missing element not mentioned is the trademark issue. Under the Lanham Act, which governs trademarks, an owner of the trademark must police that mark or they may lose it. The clearest example of losing the mark is Escalator. Escalator was a brand of moving stairs owned by a corporation. Because the company was so successful in obtaining brand recognition, everyone started calling moving stairs, "escalators" and not "escalator brand moving stairs". As a result, the company lost their rights to claim this name as their brand. If you listen carefully to Kleenex tissues or Xerox copiers advertising, you will find that both companies are very careful in their ads to use the brand name with a description of the product as I just did. Now, since you have a little understanding of trademark law and franchise law (from what the others mentioned), you can see that you are required to exercise control over your trademark and how it is used, and if you exercise control over the "licensee", require $500 or greater for a fee, services or products in the first 6 months of operation and operate under a trademark, the relationship is a franchise under federal law, no matter what name you call the relationship. As you can see, it is very difficult to have a true license arrangement, although it is possible.

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