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A Comparative Look at the Definition of "Franchise"

Written by: Peter Macrae Dillon

Article Overview: This article identifies and highlights differences between the definition of franchise contained in the Ontario legislation, the Alberta franchise legislation, the UNIDROIT Model Law, the NASAA Model Law, the Federal Trade Commission Franchise Rule and under the Canadian Franchise Association Guidelines.

A Comparative Look at the Definition of "Franchise"

Introduction

Awareness is growing in Ontario of the potentially enormous scope of the definition of franchise under Ontario's recent franchise legislation. Familiarity with the definition of what constitutes a franchise will assist franchisors and their advisers to properly discern whether their system constitutes a franchise or not and, if so, to take the appropriate steps in order to comply with the law, or to modify their system so as to avoid a finding that their business constitutes a franchise.

THE DEFINITIONS


Arthur Wishart Act (Ontario Franchise Disclosure Act), 2000

“franchise” means a right to engage in a business where the franchisee is required by cont4ract or otherwise to make a payment or continuing payments, whether direct or indirect, or a commitment to make such payment or payments, to the franchisor, or the franchisor’s associate, in the course of operating the business or as a condition of acquiring the franchise or commencing operations and,

(a) in which,

(i) the franchisor grants the franchisee the right to sell, offer for sale or distribute goods or services that are substantially associated with the franchisor’s, or the franchisor’s associate’s, trade-mark, service mark, trade name, logo or advertising or other commercial symbol, and

(ii) the franchisor or the franchisor’s associate exercises significant control over, or offers significant assistance in, the franchisee’s method of operation, including building design and furnishings, locations, business organization, marketing techniques or training, or

(b) in which,

(i) the franchisor, or the franchisor’s associate, grants the franchisee the representational or distribution rights, whether or not a trade-mark, service mark, trade name, logo or advertising or other commercial symbol is involved, to sell, offer for sale or distribute goods or services supplied by the franchisor or a supplier designated by the franchisor, and

(ii) the franchisor, or the franchisor’s associate or a third person designated by the franchisor, provides location assistance, including securing retail outlets or accounts for the goods or services to be sold, offered for sale or distributed or securing locations or sites for vending machines, display racks or other product sales displays used by the franchisee;

(“franchise”)

Alberta Franchises Act, 1995

“franchise” means a right to engage in a business

(i) in which goods or services are sold or offered for sale or are distributed under a marketing or business plan prescribed in substantial part by the franchisor or its associate,

(ii) that is substantially associated with a trademark, service mark, trade name, logotype or advertising of the franchisor or its associated or designating the franchisor or its associate, and

(ii) that involves

(A) a continuing financial obligation to the franchisor or its associate by the franchisee and significant continuing operational controls by the franchisor or its associate on the operations of the franchised business, or

(B) the payments of a franchise fee, and includes a master franchise and a subfranchise;

Federal Trade Commission

The term “franchise” means any continuing commercial relationship created by any arrangement or arrangements whereby:

(i)(A) a person (hereinafter “franchisee”) offers, sells, or distributes to any person other than a “franchisor” (as hereinafter defined), goods, commodities, or services which are:

(1 ) Identified by a trademark, service mark, trade name, advertising or other commercial symbol designating another person (hereinafter “franchisor”); or

(2 ) Indirectly or directly required or advised to meet the quality standards prescribed by another person (hereinafter “franchisor”) where the franchisee operates under a name using the trademark, service mark, trade name, advertising or other commercial symbol designating the franchisor; and

(B)(1 ) The franchisor exerts or has authority to exert a significant degree of control over the franchisee’s method of operation, including but not limited to, the franchisee’s business organization, promotional activities, management, marketing plan or business affairs; or

(2 ) The franchisor gives significant assistance to the franchisee in the latter’s method of operation, including, but not limited to, the franchisee’s business organization, management, marketing plan, promotional activities, or business affairs; Provided, however, That assistance in the franchisee’s promotional activities shall not, in the absence of assistance in other areas of the franchisee’s method of operation, constitute significant assistance; or

(ii)(A) A person (hereinafter “franchisee”) offers, sells, or distributes to any person other than a “franchisor” (as hereinafter defined), goods, commodities, or services which are:

(1 ) Supplied by another person (hereinafter “franchisor”), or

(2 ) Supplied by a third person (e.g., a supplier) with whom the franchisee is directly or indirectly required to do business by another person (hereinafter “franchisor”); or

(3 ) Supplied by a third person (e.g., a supplier) with whom the franchisee is directly or indirectly advised to do business by another person (hereinafter “franchisor”) where such third person is affiliated with the franchisor; and

(B) The franchisor:

(1 ) Secures for the franchisee retail outlets or accounts for said goods, commodities, or services; or

(2 ) Secures for the franchisee locations or sites for vending machines, rack displays, or any other product sales display used by the franchisee in the offering, sale, or distribution of said goods, commodities, or services; or

(3 ) Provides to the franchisee the services of a person able to secure the retail outlets,
accounts, sites or locations referred to in paragraph (a)(1)(ii)(B)(1 ) and (2 ) above; and

The franchisee is required as a condition of obtaining or commencing the franchise operation to make a payment or a commitment to pay to the franchisor, or to a person affiliated with the franchisor.

Exemptions. The provisions of this part shall not apply to a franchise:
(i) Which is a “fractional franchise”; or
(ii) Where pursuant to a lease, license, or similar agreement, a person offers, sells, or distributes goods, commodities, or services on or about premises occupied by a retailer-grantor primarily for the retailer-grantor’s own merchandising activities, which goods, commodities, or services are not purchased from the retailer-grantor or persons whom the lessee is directly or indirectly (A) required to do business with by the retailer-grantor or (B) advised to do business with by the retailer-grantor where such person is affiliated with the retailer-grantor; or
(iii) Where the total of the payments referred to in paragraph (a)(2) of this section made during a period from any time before to within 6 months after commencing operation of the franchisee’s business, is less than $500; or
(iv) Where there is no writing which evidences any material term or aspect of the relationship or arrangement.

Exclusions. The term “franchise” shall not be deemed to include any continuing commercial relationship created solely by:
(i) The relationship between an employer and an employee, or among general business partners; or
(ii) Membership in a bona fide “cooperative association”; or
(iii) An agreement for the use of a trademark, service mark, trade name, seal, advertising, or other commercial symbol designating a person who offers on a general basis, for a fee or otherwise, a bona fide service for the evaluation, testing, or certification of goods, commodities, or services;
(iv) An agreement between a licensor and a single licensee to license a trademark, trade name, service mark, advertising or other commercial symbol where such license is the only one of its general nature and type to be granted by the licensor with respect to that trademark, trade name, service mark, advertising, or other commercial symbol.

Draft UNIDROIT Model Franchise Disclosure Law

Franchise means the rights granted by a party (the franchisor) authorising and requiring another party (the franchisee), in exchange for direct or indirect financial compensation, to engage in the business of selling goods or services under a system designed by the franchisor which includes know-how and assistance, prescribes in substantial part the manner in which the franchised business is to be operated, includes significant and continuing operational control by the franchisor, and is substantially associated with a trademark, service mark, trade name or logotype designated by the franchisor. It includes:

(A) the rights granted by a franchisor to a sub-franchisor under a master franchise agreement;

(B) the rights granted by a sub-franchisor to a sub-franchisee under a sub-franchise agreement;

(C) the rights granted by a franchisor to a party under a development agreement

For the purposes of this definition “direct or indirect financial compensation” shall not include the payment of a bona fide wholesale price for goods intended for resale;

NASAA Draft Model Law

(g) “Franchise means

(i) an oral or written agreement, either express or implied, which:

(A) grants the right to distribute goods or provide services under a marketing plan prescribed or suggested in substantial part by the franchisor;

(B) requires payment of a franchise fee to a franchisor or its affiliate; and

(C) allows the franchise business to be substantially associated with a trademark, service mark, trade name, logotype, advertising, or other commercial symbol of or designating the franchisor or its affiliate; or

(ii) a master franchise.

Note: “Master franchise” means an agreement express or implied, oral or written, by which a person pays a franchisor for the right to sell or negotiate the sale of franchises.

Canadian Franchise Association

For CFA purposes, “franchise” means a business operated by a franchise under a contractual licence from a franchisor, (1) which is identified by a trade-mark, service mark, trade name, logo, advertising or other commercial symbol that belongs to the franchisor; (2) in which the franchisor provides or offers significant ongoing assistance to the franchisee or prescribes significant ongoing requirements for the establishment and operation of the franchised business in a uniform manner, including but not limited to management, training, goods and services, methods of operation, location, building design and furnishings, advertising and promotion, business or marketing plans, specifications and quality standards; and (3) in which the franchisor receives ongoing payments from the franchisee, usually in the form of royalties, and/or product mark-ups or fees. It is not necessary for a business to use the terms “franchisor” and “franchisee” in its contracts or other material to be considered a franchise. “Franchisor” includes affiliates and associates of the franchisor.

“Franchise” includes businesses traditionally considered to be dealerships or distributorships (provided they meet the definition above) but does not include vending machine operators. Multi-level marketers, business opportunities and businesses in which the so-called franchisee is really a salesperson.

More information.

For more information on franchising in Canada, the United States and internationally, please contact Peter Macrae Dillon, head of Siskinds Franchise Law Group. Peter is recognized expert in franchising. He is the author of the annotated Ontario Franchise Disclosure Act and the annotated Alberta Franchises Act and over 40 other publications on the subjects of franchising, licensing and distribution. He is licensed in Ontario and New York. Peter can be contacted at 800-816-9596 ext. 389 or by email at peter.dillon@siskinds.com. The information contained in this note is for general reference only, and should not be relied upon as constituting legal advice.

Disclaimer.

This article does not constitute legal advice. If you require assistance with the issues raised in this article, either to determine whether your business constitutes a franchise, to establish a franchise, or to avoid a finding that your business constitutes a franchise, you must obtain competent legal advice. Siskinds would be pleased to assist you in this regard.

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