Due diligence to prospective franchise owners is important. Part of that process is governed by a rule promulgated by the U.S. Federal Trade Commission. Specifically, the FTC has set forth the disclosures that a franchisor must provide to prospective buyers at 16 C.F.R. 436.1 et seq. Those requirements, which we will collectively refer to as the Franchise Rule, govern two types of commercial relationships: package and product franchises.
In broad terms, the distinction depends on whether the franchisor will adopt the franchisor’s trademark and established business format, or simply distribute goods produced by the franchisor or manufactured according to the franchisor’s specifications. Either way, legal remedies against franchisors might be available for certain violations under the Franchise Rule.
Keep in mind, however, that the Franchise Rule applies to franchisees, not licensees. Since there might be a fine line between a license and franchise, it is important for a prospective buyer to understand the legal implications. The classification informs the buyer’s understanding of his or her legal rights. As a law firm that focuses on franchise law, we have helped many prospective buyers understand exactly what they might be buying into, and any complex contractual terms.
Notably, the Franchise Rule offers definitional guidance. There are three defining elements of a franchise: the franchisor’s promises to provide a commercial symbol or trademark; the franchisor’s commitment to providing significant assistance over the business’ operations; and the franchisor’s receipt of payment of at least $500 during the first six months of the franchise’s operations. Of course, the interpretation of the first two elements is open to more subjective debate than the third, which is where the work of an experienced franchise attorney can provide a safety net.
Source: “When is a ‘License’ Really a ‘Franchise’?” copyright 2016, Mario L. Herman
Source: Franchise News
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