Presenting a live 90-minute webinar with interactive Q&A Avoiding the Accidental Franchise When Structuring Licenses or Distribution Agreements THURSDAY, SEPTEMBER 13, 2018 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Rochelle (Shelley) Spandorf, Partner, Davis Wright Tremaine , Los Angeles Craig R. Tractenberg, Partner, Fox Rothschild , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1 .
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Avoiding the Accidental Franchise When Structuring Licenses and Distribution Agreements THURSDAY, SEPTEMBER 13, 2018 Rochelle Spandorf, Davis Wright Tremaine LLP Craig Tractenberg, Fox Rothschild LLP
Discussion Points: Why does Franchise status matter? ◼ So, what exactly is a Franchise? ◼ How and why do accidental Franchises happen? ◼ Examples of accidental Franchises ◼ Strategies for drafting licenses and distribution agreements ◼ to avoid inadvertent Franchises Common issues and stress points in Franchise relationships ◼ Q&A ◼ 6
Why does Franchise status matter? 7
Why do companies award licenses? Licensing overcomes the two chief barriers to expansion: ◼ ◼ Capital: Licensee invests its own money to own and develop a licensed branded outlet/business ◼ Labor: Licensee (independent contractor) hires and supervises its own employees to run licensed branded outlet/business Licensing lets brand owner leverage its TMs for $$$ ◼ ◼ Licensee invests its own resources to create public awareness for a brand that it has the right to use for a defined time period, but does not own. ◼ Licensing combines one party’s TMs + operating methods with an another party’s entrepreneurial drive to “be in business for oneself, but not by oneself” ◼ Sales by licensee-owned branded outlets and distribution of branded products create revenue for TM owner ◼ Brands drive consumer decisions; a licensee hitches its future to the licensor’s brand 8
License vs. Franchise By legal definition, every franchise is a trademark license. ◼ However, not every trademark license is a franchise! TM ≠ F = F = TM TM F ◼ A distribution agreement that gives a distributor or dealer a right to sell branded goods is an implied trademark license (if not an express one)! ◼ Franchises ” are creatures of statute. There is no such thing as a common law franchise. ◼ Franchise status does not depend on what parties call their arrangement; names are irrelevant. 9
Franchises = creatures of statute SIGNIFICANT ASSISTANCE/ CONTROL or + + MARKETING REQUIRED TRADEMARK PLAN FEE or COMMUNITY OF INTEREST 10
So why does Franchise status matter? Franchises are subject to extensive regulation that licensors of ◼ non-franchise trademark licenses are able to bypass Federal and state franchise sales laws – “ front end ” ◼ Regulates the sales process ▪ Public disclosure of financial statements ▪ Personal liability for top management ▪ State relationship laws - “ back end ” ◼ ▪ Must have “good cause” to end a franchise relationship Some relationship laws impose other substantive contract ▪ terms, e.g., transfer, unilateral changes imposed by the franchisor/supplier, and more 11
So why does Franchise status matter? Non-franchise trademark licenses are private, consensual ◼ Non-franchise trademark franchisors do not have to make any public ◼ disclosure about their financial condition or other sensitive information No “front end” or “back end” laws regulate how non -franchises ◼ trademark licenses are formed or may end “At will” arrangements that allow a non -franchise a trademark ◼ licensor to terminate on X days notice = enforceable No personal liability if a non-franchise trademark licensor breaches ◼ the contract 12
Complications of Being a Franchise - Overview Franchise Sales Laws (‘front end” laws) ◼ ◼ Federal: Amended FTC Rule: presale disclosure duty, but no federal filing ◼ State: Presale disclosure + registration/filing duty Business Opportunity Laws (“front end” laws) ◼ ◼ Even if not a franchise, arrangement may be a “bus/op” ◼ More states with Bus/Op laws than franchise sales laws, but various exemptions ◼ Most Bus/Op laws regulate only when buyer starts a business, not when expanding into new line ◼ Federal and state Bus/Op laws exempt franchises that comply with Amended FTC Rule; some states may require TM owner to make filing to qualify for exemption Franchise Relationship Laws (“back end” laws) ◼ ◼ Federal: none ◼ State laws: vary widely; override contract terms 13
State Laws Regulating Franchise Sales – “Front End” Registration Filing - Full Agency Review Notice Filing for Bus/Op Exemption Notice Filing for State Franchise Sales Law Amended FTC Rule – Disclosure, but no filing req'd 14
More complications: which law applies? Amended FTC Rule applies to all franchise sales in US even when ◼ franchisor, franchisee + franchise location/territory are in same state ◼ No private right of action ◼ However, in many states, plaintiffs may bring a state “baby FTC Act” claim and rely on Amended FTC Rule violation as predicate unfair or illegal act or practice State law jurisdiction varies according to: ◼ ◼ Assigned territory; distributor or licensee’s residence/domicile; where offer/acceptance take place ◼ New York approach to jurisdiction Some state laws require that distributor/licensee maintain “place of ◼ business” in state; a warehouse or office may suffice No uniformity across states re: jurisdiction, exemptions, exclusions ◼ No federal preemption. A transaction may be exempt from the ◼ federal franchise law, but, if no counterpart state law exemption, must comply with state franchise sales law; and vice-versa. 15
Key Points About Franchise Sales Laws FEDERAL: Amended FTC Rule ◼ Pre-sale disclosure via uniform form of franchise disclosure ◼ document (“FDD”) ◼ 14 day “waiting period” before signing any contract or paying any money (even refundable deposit or option to buy franchise) ◼ No federal filing requirement or FTC review FDD must include audited financial statements for last 3 years ◼ FDD must be updated annually w/in 120 days after each FYE ◼ Material change amendments = quarterly ◼ Record keeping duties (varies by state law) ◼ No financial performance representations (FPR) without ◼ complying with FDD Item 19 disclosure rules STATE: franchise sales laws ◼ Same pre-sale disclosure duty + 14 day delivery requirement ◼ Must register with state franchise agency before offering or ◼ selling franchises to state resident or for location/territory in the state; full review registration vs. notice filing registration 16
S tates Regulating Franchise Sales Franchise registration States with bus/op laws that ▪ California exempt franchise sales if filing is ▪ Hawaii made: ▪ Illinois ▪ Florida ▪ Indiana** ▪ Kentucky (one time) ▪ Maryland ▪ Nebraska (one time) ▪ Michigan** ▪ Texas (one time) ▪ Minnesota ▪ Utah ▪ New York ▪ North Dakota ▪ Rhode Island ▪ South Dakota ▪ Virginia ▪ Washington ▪ Wisconsin** ** = notice filing states 17
Business Opportunity (Bus/Op) Laws “Front End” only; no relationship regulation $$$ to promoter + Goods/ (minimum Services amount varies) + + Start a business + (some, maintain Triggering or operate a Representations Business) 18
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