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

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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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