This Guide discusses some of the differences between a simple license and a franchise.
Elements of a Franchise
A franchise has been described as a license on steroids. In a nutshell, a franchise is a license wherein the licensor controls the licensee and benefits from that control. A franchise is governed by federal and state securities and business opportunity laws and is regulated by the Federal Trade Commission and by the states wherein the franchise does business.
Under the Federal Trade Commission's "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures," Code of Federal Regulations, Title 26, Chapter 1, Subchapter D, Part 36, better known as the FTC Franchise Rule, anyone who offers, sells or distributes goods, commodities or services (yes, even legal services), is considered to be involved in the sale of a franchise if they:
If a business model meets these three criteria, regardless of whether that business is called a franchise, that business model fall under the FTC's Franchise Rule and must comply with all federal and state franchise laws, rules and regulations.
Compliance with these laws can be cumbersome and can delay the rollout of your "licensing" program. However, failure to comply with these laws can subject you/your company's principals to liability for damages or rescission. In addition, many of these laws have provisions for criminal penalties, civil fines and the award of attorneys' fees. Unfortunately, many companies that offer dealerships or licenses discover they have sold a franchise only after an unhappy franchisee — or regulator — has filed suit against them. At that point, it is too late for the franchisor to "cure" its failure to register the franchise or to provide appropriate disclosures to the distributor or licensee.
When you work to help others establish a business, you and your attorney must consider whether a franchise or a license will apply to the relationship.
Elements of a License
A license may exhibit two of the three elements of a franchise; however, because it does not exhibit all three of those elements, a license is not a franchise. This removes the license from the scrutiny of the FTC and the state franchise/business law regulators. A license contains terms and conditions of the use of intellectual property (or tangible property, for that matter). It specifically contains a "granting clause," which says in very clear language that the licensor grants the licensee the right to use the property for this length of time and under those conditions.
Generally, the terms and conditions of a license are less restrictive for the licensee than those of a franchise are for a franchisee. One of the requirements of a franchise is the "[provision of] significant assistance to their customer (or client) in that person's method of operation"; without tight control, the franchise would fall apart. Thus, the terms and conditions of a franchise agreement state how the business will be run, what software may be used in the business, how logos and trademarks are to be displayed, the general appearance of the franchise, how to market the business, how the building that houses the franchise must be designed, and so on, and on, and on. This type of control is generally not found in a simple license agreement.
A license is governed not by federal and state securities law but by state contract law.
The parties must follow the terms of their contract. If they do not, then the injured party can seek remedy for the breach under the contract as interpreted under the law of the state wherein the contract is to be adjudicated. However, the securities laws do not come into play in the breach of a simple license agreement.