Regulatory: The 3 criteria of an accidental franchise
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.
February 22, 2012 at 04:00 AM
6 minute read
The original version of this story was published on Law.com
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.
The complexity of modern commercial relationships has led to an increasing number of accidental franchises—that is, commercial relationships not intended to be franchises, but which inadvertently fall within the broad reach of the franchise or business opportunity laws. Manufacturers or suppliers who distribute their trademarked goods or services through independent agents or licensees may easily cross the line separating ordinary business relationships from franchises.
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