Are you interested in starting a franchise in Minnesota? An important first step is understanding the FTC’s amended Franchise rule.
Note: This series of posts covering the admended Franchise Rule does not modify the amended Rule. It explains the requirements of the amended Rule. Moreover, it does not exhaustively cover every requirement contained in the amended Rule, but focuses on amended Rule provisions that depart from the familiar UFOC Guidelines.
Franchise Rule Coverage
Whether the Franchise Rule applies to a particular business relationship depends upon whether the relationship meets the Rule’s definition of a “franchise” and whether an exemption or exclusion applies.
Franchise Relationships Covered
The amended Rule covers the offer and sale of franchises. As under the original Rule, a commercial business arrangement is a “franchise” if it satisfies three definitional elements.
Specifically, the franchisor must:
- promise to provide a trademark or other commercial symbol;
- promise to exercise significant control or provide significant assistance in the operation of the business; and
- require a minimum payment of at least $500 during the first six months of operations.
Like the original Rule, the amended Rule covers business format and product franchises. The name given to the business arrangement is irrelevant in determining whether it is covered by the amended Rule. A business arrangement described as a “franchise” will not be covered unless it meets the three definitional elements in the amended Rule. In the same vein, a self-described “distributorship” will be covered by the amended Rule only if the three definitional elements are satisfied.
Further, the amended Rule covers relationships that are represented either orally or in writing as having the characteristics specified in the amended Rule’s definition of “franchise,” regardless of whether the representations are, in fact, true or can be fulfilled. Accordingly, if a seller of a business arrangement represents that it licenses its trademark, promises to provide significant assistance in the buyer’s business operations, and charges a minimum payment of at least $500, the arrangement will be covered by the Rule even if, for example, the seller, in fact, has no trademark or has no means to provide any assistance to buyers.
The three definitional elements found in the amended Rule are:
- The “Trademark” Element
- The “Significant Control or Assistance” Element
- The “Required Payment” Element
These three elements will be discussed throughout the next three posts.
This post is part of a series of posts discussing the legal aspects of franchising.