Webcast Dives into Franchise Law Requirements

Canadian and U.S. practitioners presented recently at an INTA webcast on franchise law requirements, including disclosure and the risk for trademark licensors of inadvertently creating a noncomplying franchise relationship with licensees.

The April 14 webcast, “Franchise Laws and Your Trademark Practice: What Every Trademark Attorney Needs to Know,” guides trademark attorneys and other brand professionals through state/provincial franchising laws and trademark laws in the United States and Canada. It is now available on demand on INTA TO-GO.

Marc Lieberstein (Kilpatrick Townsend & Stockton LLP, USA) moderated the discussion. The speakers, from firms and in-house settings, included Jason Adler (Cellairis Franchise, Inc., USA), Janaki Parmar (Marriott International Inc., USA), and Peter Snell (Gowling WLG, Canada).

While it is common for consumers to think about big-name franchises, such as fast food chains, Mr. Adler pointed out that far more franchise systems have fewer than 200 franchisees. Echoing this, Ms. Parmar noted: “People don’t usually realize that their local eye doctor is probably a franchise.”

Under U.S. federal law, according to Ms. Parmar, there is a three-prong definition of a franchise: (1) license of a trademark; (2) significant assistance and/or control over the franchisee’s method of operation; and (3) a fee, currently US $615.

The control is more than the normal quality control over goods and services of a trademark licensee, she said. For example, controls over hotels that are franchisees of Marriott International, Inc. can include the smell of the lobby.

“There’s multiple levels of laws or layers of laws,” said Mr. Adler. This includes national franchise laws and laws by state or province.

Speakers cautioned that even if a relationship does not meet the requirements for franchising under federal law, it can still constitute a franchise under broader state laws.

If a business meets the requirements of a franchise, the business is highly regulated. U.S. federal law requires a franchise disclosure document setting forth detailed disclosures, and 14 U.S. states require separate disclosures.

Consequences for failure to comply with franchise laws include investigation by federal and/or state attorneys general, fines, recission of franchise fees and expenses, and reputational harm.

Mr. Lieberstein pointed out how easy it is for a trademark license to fall into the three requirements for a franchise.

“Almost every trademark license you’ve ever reviewed, drafted, or negotiated” contains the elements, he said. “Suddenly—whammo!—you’ve crossed the thresholds [and] you don’t have a franchise disclosure document. What do you do?”

Ms. Parmar noted that most brands want to provide assistance to their trademark licensees, so it is common for the relationships to organizationally change over time. This frequently happens when licensors provide some type of reward system to licensees.

“It’s very easy to fall into franchise territory without trying,” she said.

According to the panelists, the benefits to a brand owner of creating a franchise include that the disclosure document clearly sets forth the responsibilities of franchisees. Mr. Snell noted that often the cost of compliance with franchise law is less than the penalty for failing to comply.

The webcast also addressed business challenges of 2020, with Mr. Lieberstein highlighting that lodging and personal services companies had difficulties while commercial and residential services and real estate franchises experienced growth.

COVID-19 affected the franchise disclosure requirements, which include forward-looking financial performance expectations. Ms. Parmar said her clients needed to amend their disclosures midway through 2020 because company expectations had changed.

“Franchise Laws and Your Trademark Practice: What Every Trademark Attorney Needs to Know” is for members and non-members.

Although every effort has been made to verify the accuracy of this article, readers are urged to check independently on matters of specific concern or interest. 

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