Three Elements of Operating a Franchise in Minnesota
Operating a franchise involves the combination of these three elements:
- A license to use a trade or service mark,
- The payment of a fee by the franchisee to the franchise for the right to enter a business, and
- Community interest’s, marketing plan or some element of control by the franchisor over the franchisee.
In other words, franchising is a method of distributing a product or service and centers around rapid growth, limited capital investment and risk avoidance.
For the owner of a franchise, operating that franchise gives an opportunity to enhance the chances of operating a successful business because you are using a brand name and product that has been proven to be successful. It also allows for the franchise owner to have access to global or national marketing that would otherwise only be available to large companies.
Minnesota Franchise Act
In 1973 Minnesota passed the Minnesota Franchise Act (MFA). The MFA is a relationship and disclosure/registration law.
The MFA closely resembles California’s Franchise Investment law with regards to the disclosure provisions. The California Franchise law states “it is the intent of this law to provide each prospective franchisee with information necessary to make an intelligent decision regarding franchises being offered.
Further, it is the intent of this law to prohibit the sale of franchises where the sale would lead to fraud or likelihood that the franchisors promises would not be fulfilled and to protect the franchisor and franchisee by providing a better understanding of the relationship between the franchisor and the franchisee with regard to their business relationship.”
The federal government adopted the FTC rule in 1979, which identified disclosures that a franchisor shall provide to any prospective franchisee in a written document. This is very similar to the many state franchise law counterparts, including Minnesota’s.
Minnesota Statute §§ 80C.01-80c.14 provide the franchisee disclosure registration and relationship provisions. Section 80C.18 authorizes the Commissioner of Commerce to “promulgate rules to carry out the provisions of sections 80C.01-80c.22.” This is significant because the Department of Commerce has adopted additional administrative rules that also apply to franchises. These administrative rules describe the “public offering statements” and pre-sale disclosure documents that the franchisee is entitled to from the franchisor.
Under the MFA a franchise is created when
- a right granted by the franchisor to the franchisee to engage in business using the franchisor’s trade name or other commercial symbol,
- a “community of interest” in the marketing of goods or services between the franchisee and franchisor, and
- a “franchise fee” is paid by the franchisee.
1. Right to Use Franchise Owners Trade Name or Other Commercial Symbol
The first aspect of a franchise, the right to use the franchisors mark, is satisfied when the franchisor grants the franchisee the right to use its mark in a franchise agreement. Unlimited Horizon Mktg., Inc. v. Precision Hub, Inc., 533 N.W.2d 63, 66-67 (Minn. App. 1995). However, any express permission to use the mark does not need to be overly explicit. The only requirement is that the franchisor allow the franchisee to use the franchisor’s name in some way or another.
2. Community of Interests
The second aspect to a franchise under the MFA is “a community of interest in the marketing of goods or services at a wholesale, retail, by lease agreement, or otherwise.” Only a few states, including Minnesota, use the term “community of interest” to describe the second aspect of a franchise agreement.
Minnesota courts construe “community of interest” very broadly. In Martin Investors, Inc. v. Vander Bie, 269 N.W.2d 868 (Minn. 1978), the Minnesota Supreme Court stated that a community of interest exists in a business relationship if the parties share fees from a common source, a fairly typical feature and any license agreement.
3. Franchise Fee
The last aspect of a franchise agreement is the franchise fee, which is a payment directly or indirectly for any fee or charge that a franchisee is required to pay, or agrees to pay for the right to enter into a business or to continue a business under a franchise agreement including but not limited to the payment either in a lump sum or by installments of an initial capital investment fee, any fee or charges based upon the percentage of growth or net sales whether or not referred to as royalty fees, any payments for goods or services, or any training fees or training school fees or charges.
Although there is a broad definition of the term fee under the MFA, the MFA states that a franchise fee “means any fee or charges that a franchise is required to pay or agrees to pay for the right to enter into a business or to continue a business under a franchise agreement.” Minn. Stat. § 80C.01(9).
Minnesota courts have held that the fee paid must be for the right to enter into a franchise business or to continue operating a franchise business to be considered a franchise fee under the MFA.