As this is my first blog post, I thought starting with some basic franchise information would be a good idea for this and the next few blog posts. In this vein, one of the most basic questions for consideration is what exactly is a franchise. As a business person, it is important to recognize whether a potential business relationship is a franchise in order to comply with both federal and state franchise laws. If the relationship meets the definition of a franchise, then the franchisor typically will be required to provide information in a prescribed format known as a Franchise Disclosure Document (“FDD”) as well as register the FDD if required by state law.
Definition of Franchise Under Illinois Law
According to the Illinois Franchise Disclosure Act (“IFDA”), a “Franchise” means a contract or agreement, whether oral or written, between two or more persons by which:
- a franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services, under a marketing plan or system prescribed or suggested in substantial part by a franchisor; and
- the operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate; and
- the person granted the right to engage in such business is required to pay, directly or indirectly, a franchise fee of $500 or more.
Illinois Franchise Law Elements
Under the IFDA, marketing plan or system means a plan or system relating to some aspect of conducting business, including but not limited to:
- specification of price, or special pricing systems or discount plans;
- Use of particular sales or display equipment or merchandising devices;
- Use of specific sales techniques;
- Use of advertising or promotional materials or cooperation in advertising efforts.
A franchisee’s business is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate if the franchise agreement or other agreement permits or requires the franchisee to identify its business to its customers primarily under such trademark, service mark, trade name, logotype, advertising or other commercial symbol in a manner likely to convey to the public that it is an outlet of the franchisor.
A franchise fee means any fee or charge that a franchisee is required to pay directly or indirectly for the right to enter into a business to sell, resell or distribute goods, services or franchises. A franchise fee may may be present regardless of the designation or form of the fee. In addition, a franchise fee may be payable in a lump sum or installments.
Avoidance of an Accidental Franchise
Regardless of what label the parties place on a business relationship, if the relationship meets the above definitional elements of a franchise, the relationship is an Illinois franchise. Recognizing when a business relationship is a franchise is important so as to prevent an “accidental franchise.” An accidental franchise can be created when someone sells a franchise without realizing the business relationship is franchise. And, as the saying goes “ignorance of the law is no excuse.” Consequently, the relationship may well be subject to franchise registration and disclosure laws including the IFDA and/or other states’ franchise investment laws and/or the Federal Trade Commission’s Franchise Rule. The consequences of a violation of these laws can be potentially severe, even where no harm was intended. We at Law Office of O. Terry Shaver, LLC have extensive experience in structuring franchise and other forms of business relationships, please feel free to contact us if we can be of assistance.