International Law

Who is a Franchisor?

One of the trends I see now is a rise in license arrangements that tout themselves as "no royalties, we are not a franchise."

Here is one example, Sign Biz which advertises:

"Because they are not a franchise there are no monthly fees to run your business.

After the initial investment of $45,000 this is a business that belongs to you with the support of a franchise.

Some of the benefits included in this opportunity are:

A protected territory.
A 3-week long training program.
An ad in the Yellow Pages.
A private network website to promote your services.
Personal coaching for two years.
Digital printing hardware and software."

Another example is Discount Party Store Developers, who advertise:

"This is not a franchise. The discount store that you build with their help is completely yours. You are truly your own boss, DPSD just helps you get there.

Any of the supplies you need for stocking your store can be found through a huge network of suppliers they offer to you. Any discount store owner could stock their store at the lowest cost possible. They do that hard work for you.

The minimum investment is $66,900. With the package purchased the new business owner would receive many different benefits including help finding the new location, help negotiating the lease, help with financing, a complete support system as well as store design and layout. The new business owner doesn’t have to worry about doing this alone. They also offer full training and support."

And what about eBiz Marketing Systems Inc, who claim:

Businesses make two major mistakes, they either don’t have a website or the one they have is not at it’s highest potential. An eBiz consultant can help those businesses get the most out of their websites to increase their sales.

The minimum investment for this opportunity is $10,000 but because this is not a franchise there are none of those franchise fees to have to worry about. For the person looking for a way to work from home, this is one business that can be run from a home office with no problem.

Some of the other things that can be expected with this opportunity are:

Live Telephone Coaching
Teleconference Support
Ongoing Support once you’re in business
Training

As a matter of law, it doesn't matter what the parties claim their relationship is. The FTC's Franchise Rule will govern based on the federal definition of what a franchise is.

The FTC Franchise Rule, which governs all businesses operating in the the United States, states that the following business relations are covered by the Franchise Rule.

"A. Alternate Definitions: The Rule employs parallel coverage definitions of the term "franchise" to reach two types of continuing commercial relationships: traditional franchises and business opportunities.

B. "Traditional Franchises": There are three definitional prerequisites to coverage of a business-format or product franchise (Parts 436.2(a)(1)(i) and (2)):

1. Trademark: The franchisor offers the right to distribute goods or services that bear the franchisor's trademark, service mark, trade name, advertising or other commercial symbol.

2. Significant Control or Assistance: The franchisor exercises significant control over, or offers significant assistance in, the franchisee's method of operation.

3. Required Payment: The franchisee is required to make any payment to the franchisor or an affiliate, or a commitment to make a payment, as a condition of obtaining the franchise or commencing operations. (NOTE: There is an exemption from coverage for required payments of less than $500 within six months of the commencement of the franchise (Part 436.2(a)(3)(iii)).

C. Business Opportunities: There are also three basic prerequisites to the Rule's coverage of a business opportunity venture (Parts 436.2(a)(1)(ii) and (2)):

No Trademark: The seller simply offers the right to sell goods or services supplied by the seller, its affiliate, or a supplier with which the seller requires the franchisee to do business.

Location Assistance: The seller offers to secure retail outlets or accounts for the goods or services to be sold, to secure locations or sites for vending machines or rack displays, or to provide the services of someone who can do so.

Required Payment: The same as for franchises. "

Note that there is no mention in this definition of continuing royalties.

All that is required, for the typical business format franchise is a continuing commercial arrangement between purchaser and seller, in which the purchaser uses the seller's trademarks, is offered significant assistance, and pays more than $500 to the seller.

That is the legal definition of a franchise.

Look over those advertisements once again. Do you think that you are dealing with a franchisor who doesn't know it?

Full post as published by Misleading Advertising Law on May 29, 2008 (boomark / email).