Expansion-minded business owners often offer trademarked products or services through licensing agreements or distribution or dealership arrangements only to discover later that what they have actually done is sell franchises. Becoming an “accidental franchisor” can spell disaster for the unwitting business owner who has stepped over the line that separates franchising from other commercial arrangements involving trademarked goods or services. When considering franchising, it is important to know the basics. That said, establishing the legal framework for a properly formed franchise relationship is a complex undertaking. To get it right, business owners and their counsel should speak with an experienced franchise attorney before getting started.

Without a basic understanding of franchise law, you may miss the warning signs that a proposed business arrangement may create a franchise. For example, if a business client asks you to draft a licensing, dealership or distributorship agreement to allow another business owner to sell the client’s trademarked products, you will need to ask additional questions. Or, if a client comes to you to discuss contracting to sell another owner’s trademarked products, you will need to recognize that this, too, may be a franchise. Unfortunately, under federal law, as well as in California, it does not matter what you call a business arrangement when you draft the agreement: if the elements of a franchise are present, it is a franchise. Franchise sellers must comply with extensive pre-sale registration and disclosure requirements or face potentially severe penalties. Attorneys who draft agreements that mistakenly create franchises will have unhappy clients when state regulators come knocking or when a franchisee sues for rescission. Knowing the following basics can help you identify franchise arrangements and prevent your ambitious business clients from becoming accidental franchisors or from inadvertently contracting with an accidental franchisor.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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