Dangerous Mistake: Filing a Franchise Agreement as a License Agreement | Franchise Law Blog

Dangerous Mistake: Filing a Franchise Agreement as a License Agreement

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Who Am I Addressing in this Article

As a franchise lawyer you would think that I am used to this by now‚ but I am not.  What I am referring to is the inadvertent (at least I hope so) disregard of the franchise laws and regulation by extremely successful and well intentioned business owners who have expanded their brand through license agreements that are nothing other than a disguised franchise.  These business owners (none of which are my client) have adopted “license agreements” that – other than avoiding the actual word “Franchise” – are absolutely franchise agreements.  That is‚ these license agreements:

  1. Establish a continuing commercial relationship;
  2. Grant a license to use certain trademarks and intellectual property;
  3. Permit the “licensor” to exert a significant amount of control over the “licensee’s” operations‚ i.e.‚ all goods and products must be purchased from the “Licensor” and the “Licensee” must conform to the “Licensor’s” standards for operation; and
  4. Involve payment of a fee.  These fees are sometimes hidden in product cost and other required purchases but they are still‚ nevertheless there.

The Risk Involved In Having a License Agreement When Fall Under Franchise Laws

Not only do these “license agreements” create a road map that would lead a regulator to absolutely conclude that a franchise relationship has been established‚ they actually take it a step further and include agreement language whereby the “licensee” agrees to obligate itself to assist the Licensor in converting the Licensee’s “licensed business” into a franchise‚ should Licensor later “apply to become a franchisor”.

Judging by the number of proposed “license agreements” that I have seen recently‚ I question and ask you to question the following:

MY RECOMMENDATION: When it comes to franchising‚ there are no shortcuts.  “Dressing up” your franchise as a license‚ in the long-term‚ will not work and is not worth the future cost or risk.

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Date: 02/03/2014 | Category: Start a Franchise

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