Licensing Agreement v. Franchise Agreement

Is it Really a Licensing Agreement, or Did You Create a Franchise?

Starting a franchise is expensive and is highly regulated not only by Minnesota Statutes, but also by the Federal Trade Commission. If one tries to avoid the world of franchises and instead create a license agreement, violations of the Minnesota Franchise Act (“MFA”) can be found. The result of a violation of the MFA could mean complete rescission of an agreement.

In Minnesota, a franchise is defined as a contract or agreement between two or more persons which satisfies the following elements:

  1. A franchisee is granted the right to engage in the business of offering or distributing goods or services using the franchisor’s trade name, trademark, service mark, logo or other commercial symbols or characteristics;
  2. The franchisor and franchisee have a “community of interest” in the marketing of goods or services; and
  3. The franchisee pays a franchise fee.

The Franchisee Uses the Franchisor’s Trademark

This is an easy element to satisfy because the franchisee does not even have to use the franchisor’s trademark. It is enough if the franchisee was merely allowed to use it. Further, even if the franchisee uses a different name of the franchisor, the element is still met if there is some other indicator that the franchisor is affiliated with the franchisee. An example of this would be a tag line that states “an affiliate of XYZ.”

Most agreements include, in one way or another, that the franchisee is able or permitted to use the franchisor’s trademark. So, if documents are being drafted purposefully to avoid a franchise agreement, time is better spent concentrating on not “violating” one of the other two elements.

“Community of Interest” In Marketing of Goods or Services

Minnesota courts have liberally applied this element. It is enough to satisfy this element if parties to an ongoing business relationship share in fees from a common source. Even if there is a small common financial interest, it usually will satisfy this requirement. More specifically, a community of interest may exist under one of two circumstances:

  1. “When a large proportion of an alleged dealer’s revenues are derived from the dealership,” or
  2. “When the alleged dealer has made sizeable investments (in, for example, fixed assets, inventory, advertising, training) specialized in some way to the grantor’s goods or services, and hence not fully recoverable upon termination.”

Payment of a Franchise Fee

This element is also liberally applied and can honestly be applied to almost any compensation paid by the franchisee. Its intention is to capture all sources of revenue that a franchisee must pay to a franchisor or its affiliate. For example, in Coyne’s & Co., Inc. v. Enesco, LLC, 553 F.3d 1128 (8th Cir. 2009), the court held that in some cases an excess inventory fee can constitute a franchise fee. As well as, a minimum volume sales requirement. Banbury v. Omnitrition Intern., Inc., 533 N.W.2d 876 (Minn. 1995).

Some of these other payments may also be considered a franchise fee:

  • Initial franchise fee;
  • Rent;
  • Advertising assistance;
  • Equipment and supplies (including such purchases from third parties if the franchisor or its affiliate receives payment as a result of the purchase);
  • Training;
  • Security deposits;
  • Escrow deposits;
  • Non-refundable bookkeeping charges;
  • Promotional literature;
  • Equipment rental; and
  • Continuing royalty on sales.
This article was written by attorney Maureen A. Carlson