In Minnesota, franchises are covered by the Minnesota Franchise Act. While this article is not an all-encompassing discussion of the nuances surrounding this area of law, it does discuss one key area: if a business is determined to be a franchise, which is offered in Minnesota, the franchisor is required to register that franchise; failing to register opens the franchisor up to significant liability.
Definition of a Franchise
In Minnesota, a franchise means, among other definitions, an agreement or contract between two or more people:
- Where the franchisee is given the right to conduct business:
- Offering the goods or services of the franchisor
- Using any of the franchisor’s characteristics, such as trademarks and logos
- Where the parties have a community of interest in marketing the goods or services:
- At wholesale
- At retail;
- By lease
- By agreement
3. Where the franchisee pays a franchise fee
In a simpler manner, a franchise is a relationship between a person or entity that owns all the intellectual property of a product or service, and another person or entity that wishes to offer that product or service in an area in exchange for paying a fee. The most widely known example of this is McDonald’s.
In Minnesota, an offer or offer to sell means, “every attempt to offer to dispose of, and every solicitation of an offer to buy, a franchise or interest in a franchise for value.” For example, an offer or offer to sell is any advertisement in a newspaper published in Minnesota, such as the Star Tribune. However, one published outside of Minnesota but circulated in Minnesota is not covered, such as the New York Times.
It is crucial to note that an important step in the process of operating as a franchisor, and offering a franchise in Minnesota, is the registration requirement—a person must not offer or sell a franchise in Minnesota unless there is an:
- Wffective registration statement on file with the Minnesota Commissioner of Commerce (“Commissioner”); or
- Exemption applicable to the agreement, such as:
- The offer or sale of a franchise that the franchisee owns
- An offer or sale involving a bank, financial organization or life insurance company
The application for registration with the Commissioner requires a public offering statement containing, among other pieces of information that are listed in the statute, the following:
- The franchisor’s name, address, business form (such as a corporation or partnership)
- Whether the person:
- Has been involved in any felonies involving crimes such as fraud, embezzlement, or deceit
- Is subject to any injunction or restrictive order for the franchise business
- The franchisor’s financial statements
- A copy of the franchise agreement
Determining a Franchise & the Risk for Failing to Register
Failing to meet the registration requirement by not submitting a public offering statement to the Commissioner is a serious offense. For example, failing to register while continuing to offer or sell a franchise in Minnesota opens the franchisor up to damages, rescission of any franchise agreement made, and other liabilities. One notable case in Minnesota is that of Martin Investors, Inc. v. Vander Bie, where the court held the defendants to be in violation of the law and ordered rescission of the franchise agreement and damages.
In that case, two Minnesota men responded to an advertisement by Computer Capital Corporation (“CCC”), a California company; even though the advertisement was not in a Minnesota-published newspaper, a representative of the franchisor discussed the arrangement over the phone with one of the plaintiffs while he was in Minnesota. In that case, the two men were supplied with presentations of CCC, along with brochures and other materials—in addition, the two men utilized information within CCC’s computer data bank to sell to potential customers. Further, CCC was entitled to a share in the proceeds from the selling efforts of the two men, along with an initial investment and charge for each unit sold—all considered a franchise fee. These facts made it quite clear that CCC was indeed a franchisor and offered that franchise in Minnesota. In the end, the franchise agreement was rescinded, the two men were entitled to receive damages of $20, 593.02, and a return of a $10,000 down payment and $20,000 promissory note.
Given the above illustration, it is quite easy for a business arrangement to be considered a franchise and for that franchise to be offered in Minnesota. In the case above, CCC was found to clearly be a franchisor and offered a franchise in Minnesota, but did not register a public offering statement with the Commissioner.
In sum, a franchisor must take care in its offerings and business agreements. Minnesota protects franchisees from any fraudulent franchise operations, and the risks and liabilities to any that violate the law are varied and can amount to significant financial liability.