Licensing vs. Franchising: Key Differences You Need to Know

Licensing and franchising are similar business and legal relationships. Some may wonder if licensing is a viable alternative to franchising.

However, these relationships have distinct and important differences. Licensing and franchising are not interchangeable terms, and each will fulfill different business goals.

What is Licensing?

A license agreement represents a relationship where the "Licensor" grants the "Licensee" the right to use their developed trademark or technology.

Types of Licensing

Some common types of licenses include:

  • A licensor grants limited trademark use rights of their branding material to the licensee for a specific purpose
  • A software company licensor grants a public domain license, allowing anyone to modify and use their software without restriction
  • A drug company licensor grants a license to another drug company to allow them to manufacture a drug from their patented formula
  • A creative entity establishes a creative commons license, allowing others to modify the material as long as credit is given to the original creator

Licenses grant limited rights that are related to specific assets. Though a license agreement allows the licensor to control how the licensee uses the asset, it does not allow the licensor to control the licensee's overall business operations.

What is a Franchise?

The term “franchise” is a legal term, representing a relationship between a "Franchisor" who grants rights to a "Franchisee." This includes the right for the franchisee to establish a business operation that is a direct copy of the franchisor's business.

A franchise is defined by the Federal Trade Commission’s Franchise Rule as "any continuing commercial relationship or which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:

  • The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;
  • The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and
  • As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment to the franchisor or its affiliate.”

In other words, the term “franchise” includes trademark licenses, distributorship, and other arrangements. The trademark owner also has the right to exert a significant degree of control over the franchisee’s method of operation or promises to provide significant assistance.

Why Licenses and Franchises are Not Interchangeable

While it may be possible to license a trademark or business system, the following factors make this difficult:

  • Provisions such as the right to approve a site for the business, impose site design or appearance requirements, dictate hours of operation, or require licensees to participate in promotional campaigns would be considered “significant control” over a licensee’s method of operation
  • Promises to provide business training, site selection assistance, a systemwide website, and/or an operations manual would be considered “significant control or assistance” in the licensee’s method of operation

Including any of these provisions, therefore, would cause the license agreement to be deemed a “franchise” for legal purposes. This would trigger an application of federal and state franchise laws regardless of the name given to the arrangement.

For more information regarding license and franchise law, reach out to the experienced attorneys of Mullin through our online contact form.

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