New York Franchise Law Blog : Franchise Lawyer & Attorney Charles N. Internicola, Providing National Representation of Franchisees and Franchisors

In the State of New Jersey any determination as to the existence or non-existence of a franchise relationship requires a a factual evaluation of the legal rights and obligations between the parties.

What Constitutes a Franchise in New Jersey?

The parameters and factors to be evaluated are defined and proscribed by the New Jersey Franchise Practices Act, N.J.S.A. 56:10-3(a), which defines a "franchise" and "franchise relationship" as one  requiring:

a written agreement for a definite or indefinite period, in which a person grants to another person a license to use a trade name, trademark, service mark, or related characteristics, an in which there is a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement or otherwise.

Based on New Jersey's definition of a franchise, franchise relationships in the State of New Jersey are characterized by (a) a written agreement, (b) a trademark license, and (c) a community of interest in the marketing of goods or services.  Factors (a) and (b) are relatively self-explanatory.  As to factor (c), a "community of interest", typically exists, where the presumptive "franchisor" / party granting the trademark license, maintains control to direct and/or influence the potential franchisees marketing and business activities.  

Why Should you Care?

If your business relationship qualifies as a franchise your legal obligations and rights will exist subject to the mandates of, among other things, the New Jersey Franchise Practices Act.  That is, your relationship as "franchisor and franchisee" will not only be governed by the terms of your written agreement but also by the statutory requirements set forth in the New Jersey Franchise Practices Act.  Examples of some statutory mandates that will be imposed on your business relationship include restrictions limiting a "franchisors" ability to terminate a franchise without "good cause" and restrictions prohibiting a franchisor from imposing  unreasonable performance requirements on its franchisees.

If you are a manufacturer or distributor with "licensed" retail outlets you must be on guard that your distribution /  licensing agreement - depending on its terms - may impose and subject your business to franchise regulation and restrictions.  if you are an independent "distributor / licensee" who sells or distributes product or services - if you qualify as a franchisee  - you may have more legal protections than you realize. 

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“Franchising” has been and remains one of the most successful vehicles for the multi-unit expansion of a business. However, for many entrepreneurs looking to expand their business and brand,“franchising” is too often disregarded as a viable business model. For these entrepreneurs, the establishment of a franchise system (unnecessarily) appears to be a daunting task and is disregarded in favor of “licensing”. That is, in an “attempted” effort to avoid franchise regulation, but nevertheless achieve brand growth, the entrepreneur (as a “licensor”) licenses his or her trade name and trademarks to third parties (known as “licensees”) who conduct their own business utilizing the licensed marks.

While “licensing” relationships, without question, possess a legitimate purpose, they are extremely limited and cannot serve as an “end-run” around franchise regulation. That is, license agreements cannot be used to create “franchise-type relationships” without the franchise regulation. The reason for this is simple: in the world of franchise regulation, “substance” matters more than “form”, labels do not matter and just because you call something a “license” does not mean that it is not a “franchise”. In short, your license agreement (no matter what you call it) may in fact be a franchise.

So, how do you determine if your license agreement “crosses the line”? You ignore titles such as “licensor”, “licensee”, “license fee” and “license agreement” and evaluate the “substance” of your business relationship. Under the federal Franchise Rule, the defining characteristics of a franchise include:

(1) Continuing Commercial Relationship.  a “continuing commercial relationship”;

(2) Agreement. a written or oral “agreement”;

(3) License. the “license” of a trademark;

(4) Control / Obligation to Support. “significant control” over your “licensees/franchisees” methods of operation, or, an obligation to “support” those operations, and

(5) Fee. the payment of a “fee”.

Since, factors (1), (2) and (3) are, by necessity, inherent to both franchise and license agreements, the determination as to whether or not your license agreement “crosses the line” into franchise territory, boils down to an evaluation of “control” and “fees”. That is:

• Will you possess significant control over your “licensee’s” methods of operation, or, in the alternative, are you obligated to provide significant support to your “licensee’s” operations? and

• Will you receive or be owed a fee as a condition for your “licensee” to commence its operations?

If the answer to both of these questions is “yes” or “possibly yes”, your “licensee” may actually be a “franchisee” and you may be subject to franchise regulation. When making this evaluation, you must go beyond labels and consider both the substance of the relationship that your are creating and the long-term goals that you are attempting to achieve.

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