Franchising Business Opportunity

Trademark licensing and franchising live together on a straight-line continuum on which no bright line separates one from the other.  At one end is the “mere” trademark license and at the other is the full-blown franchise.  However, this line contains no bright demarcation between the license and the franchise.  In fact, a franchise is always a license – though a license is not always a franchise.  Confused yet? Let our franchise attorney explain in more detail:

The definition of a “license” is the grant to the “Licensee” (person or entity granted the right to use the trademark) of the right to use the “Licensor’s” (owner of the trademark)  trademark, for a fee, and which use is subject to the Licensor’s “control” over the goods or services sold under the license.  There are three pillars:

  • (a) Licensor’s grant to the Licensee of the right to use Licensor’s trademark;
  • (b) for a fee;
  • (c) and Licensor exerts some direction and control over Licensee’s use of the trademark.

The definition of a franchise (taken from the federal definition of a franchise – 16 Code of Federal Regulation 436 et seq.) and paraphrased here is:

  • (a) “Franchisor’s” (owner of the trademark) grant to Franchisee (person or entity granted the right to use the trademark) of the right to use Franchisor’s trademark;
  • (b) for a fee;
  • (c) and Franchisor exerts a “significant degree of control over the Franchisee’s method of operation”, or “provides significant assistance in the Franchisee’s method of operation.” id. at Section 436.1(h)

The distinction is only one of degree – which always ends up being in the eye of the beholder.  Mere licensing is not the subject of specific license-directed federal or state regulation, though as with any contract, it is subject to other state and federal laws.  Franchising on the other hand is subject to specific federal regulations (See. Disclosure Requirements and Prohibitions Concerning Franchising, 16 C.F.R. 436 et seq.), and in 19 states is subject to some form of statutory compliance (either by registration of the franchise; the filing of an exemption; or a mere notice).  It is the burden of the Licensor to prove that its license has not crossed the indistinct, fuzzy line between the license and the franchise.

Franchise Business Opportunities

Open For Business!

Compare the above to the “business opportunity”.  At first blush, any reasonable businessperson who operates a business or who is interested in buying a business, is participating in a business opportunity.  In 1979 however, the federal government entered the fray by first defining a business opportunity, and by then regulating it with franchise.  This law was updated in 2013 to separate it from franchise regulation.

In a business opportunity setting, the “purchaser” is specifically prohibited from using the “seller’s” trademarks.  The lack of this element removes the business opportunity from federal franchise regulation and usually from franchise regulation by the states.

The federal definition of a “business opportunity” is found at 16 C.F.R. 437 et seq., and contains the following paraphrased requirements:

  • (a) the seller solicits a prospective purchaser to enter into a new business;
  • (b) the prospective purchaser makes a required payment; and,
  • (c) the seller represents to the purchaser that seller will:
    • (i) provide locations to the purchaser for the use or operation of the equipment or services sold to purchaser; or
    • (ii) provide outlets, accounts, or customers (including internet access) to the purchaser and to whom the purchaser may sell the goods or services; or,
    • (iii) buy back from purchaser any of the goods or services that purchaser creates in the business.

Lest, one think that it is safe to offer business opportunities that fall outside the above definition, some 25 states have business-opportunity-specific statutes that often embrace the above definition, or that expand the above definition to embrace a vastly larger set of business opportunity offerings.

The bottom line is that one should work closely with a franchise lawyer who understands the ins and outs of these laws.  A “mere” business lawyer may not have the training or experience in this sophisticated and highly regulated industry.