What Constitutes a Franchise Relationship?

Posted on Blog June 8, 2015


This is a question that often finds its way in franchise litigation where the litigants’ agreement does not explicitly spell out the parties’ relationship as a franchise relationship. To decide this issue, Courts often resort to the state laws which govern the parties’ agreement. Several state franchise statutes (including Wisconsin, Minnesota, California, and Hawaii) define the franchise relationship as an agreement that (1) allows the franchisee to use the franchisor’s trademarks and logo in the sale of a particular good, (2) which creates a common financial interest between the franchisee and the franchisor, and (3) requires that franchisee to pay a direct or indirect franchise fee.  Florida, on the other hand, does not require the franchisee to pay a franchisee fee in order for the relationship to qualify as a franchise relationship.

The fact that the parties’ agreement may describe the parties’ relationship as something other than a franchise relationship does not control. For example, In Cycle City, Ltd. v. Harley Davidson Motor Co., Inc., Case No. 14 – 00148 HG-RLP at *24 (D. Haw. May 26, 2015), the district court rejected Harley Davidson’s argument that a license agreement that allowed Cycled City to sell Harley Davidson trademarked goods and accessories is not the typical franchise agreement.  The district court went on to say that the issue turns on how much control or input Harley Davidson had over Cycle City’s business, an issue that the court described as a matter of degree that raises a factual question in the case.

The upshot of Cycle City is that regardless of how the license or distributorship agreement describes the relationship between you and the trademark owner, the parties’ contractual obligations may say otherwise. Careful consideration should be given to the amount of say the trademark owner should have in the licensee’s use of the mark otherwise the mark owner may find itself subject to more regulations and obligations than what expressly bargained for in the parties’ agreement.

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Beshoy Rizk
Associate


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