License Agreements, Franchise Agreements and Unintended Consequences in the State of New Jersey
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Can you expand your business in the State of New Jersey through a "license agreement" without triggering New Jersey's franchise relationship laws? (This is not a simple question and, unfortunately, the answer involves an evaluation of both "objective" and "subjective" factors.)
Short Answer:
Yes, however you must discuss and evaluate the substance of your license agreement, including your degree of control over your "licensees" operations and your economic influence over your "licensees" business.
Long Answer :
The New Jersey Franchise Practices Act contains extensive prohibitions and restrictions governing (and in many cases modifying) the contractual relationship between franchisors and franchisees within the state. Under New Jersey law the following criteria give rise to a franchise relationship and the potential imposition of franchise regulation:
- The existence of a written agreement for a definite or indefinite period;
- Providing for a license to use a trade name, trademark, service mark or related characteristic is granted; and
- The existence of a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise.
With New Jersey's definition of a "franchise" heavily dependent on the existence of a "trademark license", your contemplated "license agreement" may have the unintended consequence of creating a regulated "franchise relationship". To determine if your (1) written (2) trademark license agreement "crosses the line into franchise territory" you must evaluate the (3) community of interest criteria and determine whether or not your written license agreement "creates a community of interest [between you and your licensee] in the marketing of goods or services..."
This "community of interest" criteria is not defined by the New Jersey statute, involves a subjective determination and has been expansively evaluated by New Jersey courts in favor of finding a franchise relationship. To make this determination the courts look to the relationship between the parties and, among other things, the extent to which the licensee (franchisee) is economically dependent on the licensor (franchisor). That is, where a licensee invests in a business that is largely dependent on a licensor's trademarks, products and/or services and where the licensor possesses significant influence over the licensees business, a "community of interest" (and thereby a franchise relationship) may exist. Some of the factors that the courts have found to be relevant, include:
- The extent and nature of the licensees /franchisees business investment;
- The bargaining power between the parties;
- The licensees/franchisees economic dependence on the licensor's/franchisor's goods or services;
- The licensor's/franchisor's control over the goods and services offered by the licensee/franchisee; and
- The licensees/franchisees ability to procure and/or offer goods supplied by a third-party.
Ultimately, any determination as to whether or not your New Jersey license agreement "crosses the line" into franchise territory will require a detailed evaluation of your written agreement and the economic relationship and legal rights that you create. If your "license agreement" gives rise to a "franchise relationship", your licensee (and now franchisee) will be granted substantial protections and rights granted by the New Jersey Franchise Practices Act. The key is to be aware of this "unintended consequence" when structuring and planning your "license" agreements and business relationships
Excellent overview, you should consider cross posting it at bluemaumau.org.
How does New Jersey regulate the sale of business opportunities? I know that they don't have a separate law.
I believe I understand that the difference between a licensor and a franchisor is in the matter of control over the actual business operation of the licensee or the franchisee.
The licensor and the licensee are two independent contractors who negotiate a contract to sell a product/service but the licensor does not dictate or control the means or ways of selling or distributing the product/service to the extent that the licensee is almost entirely dependent upon the licensor for his livlihood.
Of course, licensing is much cheaper from the legal standpoint, isn't it, because the contract between two independent contractors that is not underlain by federal and state franchise law requires much less legal work and compliance with special state and federal laws that govern franchising. It is a much faster and cheaper way to go than franchising.
Licensing and licensors are overseen by the laws of the states concerning commercial contracts, tort, and criminal fraud, aren't they? Licensors are subject to private actions for "fraudulent inducment/concealment" in the forming of their contracts under state law, while franchisors, under the supremecy of federal law over state law, are not subject to private actions for fraudulent inducement/concealment claims in pre-sale under either state or federal law because of the public policy effected by the FTC Rule in 1979.
Obviously, the protection of franchisors against fraud claims from franchisees that is provided by the FTC Rule and State FDD's is an inducement to franchise a business and this is why franchising has been growing in our economy over the licensing of the distribution of products/services in the economy.
The franchisor, because of the control and the onerous contracts that are generally not bargained by the more visible franchisors, becomes the senior partner in the franchisee's business who can profit whether or not the franchisee ever makes a dime in profits.
What a spectacular business model for franchisors who claim they have no fiduciary duty to their franchisees and that these hybrid legal relationships are just the agreement of two independent contractors dealing with each other under the terms of the unilateral contract.