Dangerous Mistake: Filing a Franchise Agreement as a License Agreement

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:

• Are lawyers actually drafting these license agreement and‚ if so‚ do their clients really under the significant exposure that they may be subjecting themselves to in the future‚ i.e.‚ when you have a disgruntled “licensee” who consults with an experienced franchise lawyer or contacts the attorney general?
• If you have a successful business and you wish to expand‚ you must understand that for all but an extremely limited number of situations you will be required to satisfy the franchise laws and regulation.
• If you are a successful business owner that is looking to disguise a franchise as a license due to a lack of capital for preparation of a Franchise Disclosure Document and other franchise compliance activities‚ I can assure you that the cost savings is just not worth the future litigation risk and exposure.  Worse‚ when you do eventually decide to franchise your business‚ I can assure you that your license agreements will constitute nothing other than expensive problems that you will be required to address.

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.

By Charles Internicola February 3, 2014