Regulatory: The 3 criteria of an accidental franchise: An intended trademark license might legally be a franchise if it meets these qualifications


Originally published in InsideCounsel on February 22, 2012.

Companies that market their goods or services through independent distributors may be surprised to learn their distributorship arrangement is in fact a franchise subject to federal and/or state regulation. Similarly, what may seem like a simple trademark license often crosses the line into franchise territory.

Franchise relationships are governed at the federal level by the so-called Franchise Rule, regulated and enforced by the Federal Trade Commission. A slight majority of states have some form of franchise law or business opportunity statute. What constitutes a franchise or a business opportunity subject to these federal and state regulations is determined by the nature of the relationship, not by the label given to it by the parties.

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