Franchise Rule Exemptions

Franchise Rule Exemptions

Narrow exemptions from compliance with the federal rule...

Single User Licenses Are Exempt.

Franchise law does not apply when you only have two parties involved in the entire system. If Party A licenses his business method and trademark to Party B, but to nobody else, ever, this is known as a single user license and is exempt from the franchise laws. This is because franchising is intrinsically a licensing arrangement between three or more parties, where one is the owner of the system & trademark and the remainder are businesses which want to use it under license. Note that there is more than one licensee. This gives rise to a system or group of licensees. This is the heart of the franchising concept. In other words, there is a pioneer of a business system with a trademark, and multiple folks who are willing to pay to use it. Many companies try to set up such systems via simple licensing agreements, since these are cheaper than complying with the details of the Federal franchise rule and its required disclosures. Unfortunately, these attempts to circumvent the law are normally fatal to a franchisor, who will be required to disgorge not only all of the collected fees and royalties, but to pay for all the consequential damages caused to the licensee if the franchisor has failed to comply with the Federal franchise rule. But the agreement between two parties alone, even if a licensing agreement for a trademark and business system, is not considered a franchise operation because there is only one 'franchisee'. It is not really a franchise, and hence it is exempted from the Federal franchise rule requirements. You can set up this kind of arrangement through a licensing agreement. As soon as you contemplate having more than one licensee, however, you are a franchise and must fully comply. This includes drafting a franchise disclosure document (FDD) and following all of the Federally prescribed procedures relating to the FDD. It is complex. If you are not certain whether or not you fall into this exemption, call a Denver Franchise Lawyer at The Vasilco Law Group, P.C. We would love to speak with you.

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