Franchising and licensing are often appealing models for businesses looking to expand. With either model, a franchisor or licensor can broaden the reach of their business without having to rely solely on their own capital. However, it is important that the two models be contrasted as against the legal framework within which they each operate.
In provinces that have franchise legislation, a franchisor is required to follow a certain set of requirements including delivering a disclosure document to a prospective franchisee. The disclosure obligations are relatively onerous and require that a franchisor disclose all material facts relating to the franchise being granted.
A business owner may find the disclosure requirements cumbersome and instead opt to license their brand on the assumption that this is a viable alternative to franchising. Unfortunately, without proper legal advice, this assumption may prove to be a costly mistake.
Section 1(1)(d) of the Franchises Act (Alberta) defines a “franchise” as a right to engage in a business:
- in which goods or services are sold or offered for sale or are distributed under a marketing or business plan prescribed in substantial part by the franchisor or its associate;
- that is substantially associated with a trademark, service mark, trade name, logotype or advertising of the franchisor or its associate or designating the franchisor or its associate; and
- that involves
- a continuing financial obligation to the franchisor or its associate by the franchisee and significant continuing operational controls by the franchisor or its associate on the operations of the franchised business, or
- the payment of a franchise fee.
As evidenced above, the law does not focus on the specific way that you refer to an agreement or the headings you use. If you sign a “license agreement”, but the substance of such an agreement is that of the grant of a franchise (determined through the satisfaction of the test above), then you are required to abide by franchise laws. In the unfortunate event that a licensor grants a license that is, in fact, a franchise, then the licensor may be exposed to a claim from its licensee for cancellation of the license agreement in the future along with an obligation to reimburse the licensee for any net losses that it has incurred over a certain period of time in acquiring, setting up and operating its licensed business.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Linmac LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.