Exemption From Franchise Rule: Exclusions from the Amended Rule

Exclusions from the Amended Rule

The following relationships are excluded from the amended Rule. Although each of these relationships may have some superficial similarities with a franchise relationship, none of them meet the definitional elements of the term “franchise,” and should not be confused with a franchise relationship.

Employer-Employee Relationship Exclusion

Bona fide employer-employee relationships are excluded from coverage under the amended Rule. The Commission will apply the traditional test of “right to control” in determining whether an employment relationship exists. Specifically, in determining whether a bona fide employer-employee relationship exists, the Commission will consider:

whether the employer pays a salary or definite sum of money as consideration for the work; whether the employee can be discharged or his employment terminated without liability on the part of the employer; and (3) whether the “employee” must invest money in the business before being “hired.” General Partner Relationship Exclusion

Bona fide relationships among general partners are excluded from coverage under the amended Rule. All partners in the partnership must be general partners to qualify for the exclusion. The Commission will look carefully at “partnership” arrangements that seek to exploit this exclusion by, for example, structuring a relationship to shield a “limited partner” (a de facto franchisor) from liability to the disadvantage of the “general” partner (a de facto franchisee).

Cooperative Associations Exclusion

Two types of “cooperative associations” qualify for this exclusion: (1) agricultural cooperatives authorized by the Capper-Volstead Act, 7 U.S.C. § 291; and (2) retailerowned cooperative chains. Retailer-owned cooperatives are those operated by and for independent retailers on a cooperative basis. The members must be independent retailers, and the organization must furnish services or goods primarily to its members.

Certification or Testing Services Exclusion

The amended Rule continues to exclude relationships that are created solely by arrangements with bona fide certification or testing services, such as are offered by Underwriters Laboratories and similar organizations. Franchising involves distribution of goods or services through selected outlets. In contrast, certification or testing services authorize use of their trademark by all parties meeting their standards and willing to pay their fee.

Single Trademark License Exclusion

The amended Rule continues to exclude trademark licensing arrangements in which a single licensee is granted the right to use the trademark. This exclusion also includes a “one-on-one” licensing arrangement, i.e., the license of a trademark to a single licensee who manufactures the trademarked goods according to the licensor’s specifications. This arrangement is common, for example, in the clothing industry where trademark owners license the manufacture of textiles. The exclusion also includes “collateral product” licensing, i.e., the practice of licensing a trademark that is well-known in one context (e.g., a soft drink logo) for use in another (e.g., on clothing or decorative items embossed with the soft drink logo). This exclusion also includes licensing agreements entered into in the course of settlement negotiations in trademark infringement litigation, when the licensor grants the “infringing” party a license to use the trademark for a specified period.

CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.

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