What is the difference between a franchise and a license?
A franchise exists between the owner of an identifying trademark and the operator of a business using the trademark when:
- The franchise owner engages in offering, selling or distributing goods or services under a marketing plan or system, prescribed in substantial part by the Franchisor
- The franchisee's business is substantially associated with the franchisor and the franchisee pays a fee to the franchisor or an affiliated party, directly or indirectly, in order to engage in the business
The first of these conditions exist when the franchisor:
- Provides the franchisee with advice and training
- Retains significant control over the conduct of the franchisee's business, grants the franchisee an exclusive territory, or requires the franchisee to purchase or sell a specific quantity of the franchisor's goods or services.
A simple test determines whether the franchisee's business is substantially associated with the franchisor: if the former uses the latter's trademark to identify its business, it is substantially associated with it.
As for fees, they include payments made by a franchisee to a franchisor when signing a franchise agreement and payments made for training and assistance, royalties or inventory. Business relationships that do not satisfy these conditions may be licensing arrangements, distributorships, dealerships, or any one of a variety of other business relationships.
The key question is not whether the business entities entering into the arrangement intend to establish a specific relationship (e.g, a licence rather than a franchise); the key is whether they operate independently, even though one buys and sells goods produced by the other under a trademark.
The relationship between franchisor and franchisee, by way of contrast, is a dependent one, as evidenced by the arrangements regarding marketing, training, and the like.
By Tony Fitzpatrick, Managing Partner