For decades, non-franchise businesses have tried using a quasi-franchise business model (i.e., any business format license) to distinguish themselves from franchisors to avoid onerous franchise investment laws. A recent federal decision from California serves as an important reminder that it doesn't pay to skirt franchise registration requirements when a business arrangement meets the threshold requirements of a franchise.
In Chicago Male Medical Clinic v. Ultimate Management, Inc., a federal district court in Los Angeles ruled that a consulting agreement between a Chicago medical clinic and a management company amounted to the sale of a franchise under Illinois law.
The parties stipulated to the following facts: the clinic and the franchisor entered into a consulting agreement, giving the franchisee:
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the right to use the National Male Medical Clinic trademark;
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a suggested marketing plan;
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access to the franchisor's expertise and knowledge in advertising and marketing certain medical services; and
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call center services.
Pursuant to the agreement, the franchisee paid an initial fee of $300,000, over $56,000 in royalties, and call center fees of over $45,000. The franchisee filed suit, alleging fraud for failure to follow disclosure requirements under the Illinois Franchise Disclosure Act ("IFDA").
Finding that the management company violated the IFDA by failing to register with the Illinois Attorney General's Office and failing to deliver a disclosure document, the court entered judgment in favor of the medical clinic, awarding the return of the initial $300,000 investment, and over $56,000 in royalties paid, plus costs and attorney fees.
Franchise laws are written in broad terms and are designed to protect franchisees. So licensors in business arrangements that fit the criteria of a franchise can wind up paying heavily on the back end if they dodge the franchise registration process.
Click: Chicago Male Medical Clinic, LLC v. Ultimate Management, Inc. et al., DC Cal. for further information.
