Franchise vs. Licensing Agreement: What is the Difference?
Most of us are familiar with franchises. Many fast food restaurants and retail stores are franchises. Services can also be franchises, like tax preparation companies. In general, a franchise is a business form where you pay a fee to the franchisors allowing you, the franchisee, to use their business logo, name, product, and business system. Indeed, to be a proper franchisee you are required to use their logo, name, product, and business system.
What about licensing agreements? How are those different? Here is what you need to know.
San Diego Franchise Law: What is a “Franchise?”
Under the California Franchise Relations Act (“CFRA”), a franchise is defined as:
” … means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:
(a) A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and
(b) The operation of the franchisee’s business pursuant to that plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate; and
(c) The franchisee is required to pay, directly or indirectly, a franchise fee.”
See Cal. Bus. & Prof. Code, § 20000 et seq. The CFRA definition is similar to the definition used in regulations promulgated by the Federal Trade Commission (“FTC”). See CFR, Title 26, Chapter 1, Subchapter D, Part 36.
If a business relationship/contract meets the three-part definition under the CFRA, then the relationship will be deemed a “franchise” by California courts.
San Diego Franchise Law: What is a “Licensing Agreement?”
Most often, a licensing agreement allows the licensee to use the trademark, logo, insignia, or other intellectual property of the licensor for a fee under whatever terms and conditions might be set forth in the agreement. A common example is t-shirt sales. The licensing company grants a license allowing use of its trademark to be displayed on t-shirts in exchange for a royalty/licensing fee. The agreement may have quite extensive limitations and requirements such as rules with respect to quality of the t-shirt, geographical limitations (only San Diego) or type of location (sporting event) where the t-shirts may be sold, limitations as against other types of clothing, methods for how the logo can be affixed, etc.
Despite having extensive rules and regulations, a “licensing agreement” will NOT be considered a franchise agreement unless there is present all three parts of the definition of a franchise. Thus, in our t-shirt example, if there is no business plan, model, or system that is required to be used, then there is no franchise. Likewise, if the licensing company does not allow the use of its trademark, logo, advertising, etc., then the arrangement is not a franchise even if the licensing company requires strict compliance with a business model, plan, or system.
San Diego Franchise Law: Contact San Diego Corporate Law
For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard can help you understand the difference between franchise laws in California and the laws that apply to licensing agreements. For example, among other differences, as suggested above, federal law is implicated with respect to franchises; only state law governs franchise agreements. Contact Mr. Leonard by email or by calling (858) 483-9200.