Can you expand your business in the State of New Jersey through a license agreement without triggering New Jersey’s franchise relationship laws? (This is not a simple question and, unfortunately, the answer involves an evaluation of both objective and subjective factors.)
Yes, however you must discuss and evaluate the substance of your license agreement, including your degree of control over your licensees operations and your economic influence over your licensees business.
Long Answer :
The New Jersey Franchise Practices Act contains extensive prohibitions and restrictions governing (and in many cases modifying) the contractual relationship between franchisors and franchisees within the state. Under New Jersey law the following criteria give rise to a franchise relationship and the potential imposition of franchise regulation:
- The existence of a written agreement for a definite or indefinite period;
- Providing for a license to use a trade name, trademark, service mark or related characteristic is granted; and
- The existence of a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise.
With New Jersey’s definition of a franchise heavily dependent on the existence of a trademark license, your contemplated license agreement may have the unintended consequence of creating a regulated franchise relationship. To determine if your (1) written (2) trademark license agreement crosses the line into franchise territory you must evaluate the (3) community of interest criteria and determine whether or not your written license agreement creates a community of interest [between you and your licensee] in the marketing of goods or services.
This community of interest criteria is not defined by the New Jersey statute, involves a subjective determination and has been expansively evaluated by New Jersey courts in favor of finding a franchise relationship. To make this determination the courts look to the relationship between the parties and, among other things, the extent to which the licensee (franchisee) is economically dependent on the licensor (franchisor). That is, where a licensee invests in a business that is largely dependent on a licensor’s trademarks, products and/or services and where the licensor possesses significant influence over the licensees business, a "community of interest" (and thereby a franchise relationship) may exist. Some of the factors that the courts have found to be relevant, include:
- The extent and nature of the licensees /franchisees business investment;
- The bargaining power between the parties;
- The licensees/franchisees economic dependence on the licensor’s/franchisor’s goods or services;
- The licensor’s/franchisor’s control over the goods and services offered by the licensee/franchisee; and
- The licensees/franchisees ability to procure and/or offer goods supplied by a third-party.
Ultimately, any determination as to whether or not your New Jersey license agreement crosses the line into franchise territory will require a detailed evaluation of your written agreement and the economic relationship and legal rights that you create. If your license agreement gives rise to a franchise relationship, your licensee (and now franchisee) will be granted substantial protections and rights granted by the New Jersey Franchise Practices Act.
The key is to be aware of this unintended consequence when structuring and planning your license agreements and business relationships