Whether a particular relationship is considered a franchise requires an in-depth dive into both federal and state statutes defining a “franchise.” As is common in all states that have passed franchise acts, the definition of a franchise includes various elements. While these elements nearly always include the use of a trademark or association with a trademark, a community of interest between the parties, and/or a franchisor’s marketing plan assistance and/or control, the most fundamental element is the payment of a “franchise fee.”
Federal Franchise Rule
The start of any inquiry into whether or not a particular business entity is considered a “franchise” should always begin with a glance at the Federal Trade Commission Franchise Rule (“FTC Rule”). Effective since October 21, 1979, the FTC Rule was designed to equip potential franchisees with protection before expending (potentially) significant funds in a franchise investment.
The FTC Rule provides:
(h) 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.
16 C.F.R. § 436.1(h). As seen, the FTC Rule makes no mention of a “franchise fee.” And instead, requires a “payment.” This “required payment” element encompasses “all consideration that the franchisee must pay to the franchisor or an affiliate, either by contract or by practical necessity, as a condition of obtaining or commencing operation of the franchise.” 16 C.F.R. § 436.1(s).
State Franchise Acts
Even though the Federal Trade Commission enacted the FTC Rule, various states can (and indeed, most have) choose to enact their own statutes to furnish both current franchisees and potential franchisees with protection. Currently, there is no uniform definition of a “franchise” among the states, and not all states require the payment of a “franchise fee” in their respective definition of a franchise. In those states that have enacted a state specific franchise act, entities should still be aware of Business Opportunity Laws, and other industry specific laws, that might still govern some aspects of a franchise or business relationship.
Despite statutes defining what “is” and what “is not” to be considered a franchise fee, it is not surprise that these statutes leave much ambiguity in their application. In the following blog posts, we will review cases throughout the years litigating the franchise fee element.
*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.