Every franchise lawyer knows that one of the conditions for a distribution arrangement to be considered a franchise is that the franchisee is required to pay (whether in cash or other consideration) a “fee” to the franchisor or its affiliate (hereinafter referred to collectively as the “Franchisor”). The term “fee” is broader than it might first appear. Direct fees are easy to spot—usually they are represented by cash payment to the franchisor for the right to obtain access to the franchisor’s system and trademarks, and may be up-front payments or ongoing royalty payments.
There are some exceptions to this definition. For example, payments for inventory sold to a franchisee at bona fide wholesale prices are not considered fees. Also, in some jurisdictions, there are exemptions for small payments—typically $500 or less.
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