Beware of the Franchise

by Kip R. Peterson and Dainel D. Ganter, Jr.
Spring 2010  In Brief Newsletter

Believe it or not, your business could be a FRANCHISE.  If so, failure to comply with applicable laws and regulations could result in serious consequences.  Ignorance of these laws and regulations is no defense.

When most people think of a franchise they think of fast-food restaurants, fitness chains and hotels.  However, Minnesota law broadly defines the term “franchise,” potentially expanding the reach of the franchise laws and regulations to include legal arrangements such as license agreements, consulting agreements, and distribution agreements.  It is important to note that it doesn’t matter what the parties call their relationship.  If the elements of a franchise are met, the parties must comply with the franchise laws and regulations.

Minnesota law defines a “franchise” 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 symbol 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.

Two of the three elements of a franchise are relatively straightforward.  With respect to the trademark element, if one party sells goods or services using the other party’s trade name or trademark, the element is met.  Even if the agreement does not require use of a particular trade name or trademark, permissive use of a mark is enough.  With respect to the franchise fee element, a “franchise fee” includes any fee or charge required to be paid “for the right to enter into a business or continue a business under a franchise agreement.”  While there are various exceptions, most advance payments, as well as many ongoing payments (e.g., royalties, or license fees), qualify as franchise fees.  The third element, requiring a “community of interest,” is somewhat less definite.  However, in Minnesota, courts have found that whenever two parties share in the revenues from a common product or service, this element is satisfied.

If you are contemplating entering into a business relationship in which another party will pay you money for the right to sell goods or services using your trade name or trademark, it is imperative that you determine whether or not the arrangement is subject to Minnesota franchise law.  If the elements of a franchise are met, the franchisor is required to file and maintain a registration with the State of Minnesota.   Failure to file a registration statement and to otherwise comply with the applicable laws and regulations can result in both civil and criminal penalties.  Furthermore, the franchisee may be entitle to “rescind” the agreement, requiring the franshisor to refund all of the fees and other amounts paid by the franchisee.

As always, the experienced business attorneys at Barna, Guzy and Steffen, Ltd. stand ready to assist you.   If you have questions about Minnesota franchise law, or any other business issue, please do not hesitate to contact us.

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