or Private Regulated Business Opportunity?

CAVEAT: THIS IS A CONDENSED, SUMMARY TREATMENT DESIGNED TO PROVIDE A VERY GENERAL OVERVIEW OF AN AREA OF PRACTICE CHARACTERIZED BY FACTUAL DETERMINATIONS AND JUDGMENT CALLS. IT IS NOT LEGAL ADVICE AND SHOULD NOT BE RELIED UPON FOR THAT PURPOSE. THERE IS NO SUBSTITUTE FOR THOROUGH RESEARCH AND INFORMED ANALYSIS.

1. WHY SHOULD YOU CARE?

Offers and sales of franchises and business opportunities are regulated by state and federal law. The definitions in those laws are generally quite broadly stated and frequently quite broadly construed by regulators and courts. License and distribution agreements can frequently fall within these broad definitions, particularly if the licensor requires or permits use of its trade identity, imposes requirements that dictate or control production or business operations, or provides services or materials that assist in the operation of the licensee’s business.

The consequences of falling within the purview of these legal definitions include requirements of delivery of an offering circular including 20 disclosure items and audited financial statements, pre-offering filing with and approval by state regulatory authorities, limitations on the use of earnings claims, limitations on termination and nonrenewal, and availability of statutory rescission rights, damages, and other remedies as well as the possibility of state or federal regulatory actions and penalties and even criminal penalties. An attorney must also be concerned about due diligence obligations that may attach to franchise offerings and malpractice claims that can result from failure to identify the possibility and consequences that a business relationship or arrangement may fall within the definition of these laws.

Because this issue generally arises in the context of a failed business enterprises and the laws are essentially consumer protection statues, the risk of a license or distribution agreement being found to be a franchise or regulated business opportunity is real and can have very significant economic consequences, including rescission rights, penalties, and cease and desist orders.

2. THE DEFINITIONS.

2.1 Franchises.

Federal Trade Commission Rule on Franchises and Business Opportunity Ventures (16 CFR Section 436):

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

(1)(i)(A) A person (hereinafter “franchisee”) offers, sells, or distributes to any person other than a “franchisor” … goods, commodities, or services which are:
(1) Identified by a trademark, service mark, trade name, advertising or other commercial symbol designating another person …; or
(2) Indirectly or directly required or advised to meet the quality standards prescribed by another person … 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.
…

(2) 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 franchise.” Emphasis added. (Note that the Rule exempts payments that total less than $500 made at any time up to 6 months after commencing operation of the business.)

Typical State Law Definitions.

Sixteen states have laws pertaining to offers and sales of franchises. They are listed in Appendix 1. There are two typical patterns of definition in state franchise statutes: the marketing plan or system definition and the community of interest definition. These generally have in common definitional elements including use of the franchisor’s trade identity and payment of something that amounts to a franchise fee but differ on the third element of the definition.

Marketing Plan or System–California:

“`Franchise’ means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:

(1) 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 in substantial part by a franchisor: and
(2) The operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisors’ trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and
(3) The franchisee is required to pay, directly or indirectly, a franchise fee.”

Community of Interest–Minnesota:

“`Franchise’ means (a) a contract or agreement , either express or implied, whether oral or written, for a definite or indefinite period, between two or more person:

(1) by which a franchisee is granted the right to engage in the business of offering or distributing goods or services using the franchisor’s trade name, trademark, service mark, logotype, advertising, or other commercial symbol or related characteristics;
(2) in which the franchisor and franchisee have a community of interest in the marketing of good or services at wholesale, retail, by lease, agreement, or otherwise; and
(3) for which the franchisee pays, directly or indirectly, a franchise fee ….”

(Remember, not all state law definitions are alike or even fit these standard patterns. Virginia for example does not have a franchise fee requirement and New York has a unique definition that includes only a trademark element and the payment of a franchise fee.)

A community of interest generally depends upon a finding that the agreement between licensor and licensee created a common financial interest. A marketing plan or system determination is generally based on the existence of business operations that appear to the public to be a single commercial system or that are characterized by general business controls or assistance.

The trap for the unwary lies in the fact that the definitions cover not only what we commonly think of as a franchise–a business format or package arrangement like McDonalds–but also what is described as a product and trade name franchise–dealers, distributors, or licensees who sell a product belonging to another and use the name, marks, advertising, or other elements of the trade identity.

2.2 Business Opportunities.

Twenty-five states have laws regulating offers and sales of what are described as business opportunities or seller assisted marketing plans. They are listed in Appendix 2.

These laws are directed at arrangements that fall short of franchises but are characterized by the presence of a marketing arrangement in which i) products, equipment, supplies, or services are sold or leased; ii) to enable the buyer to start a new business; iii) the seller makes one or more of the following representations: (a) the seller will provide or assist the buyer in obtaining locations, accounts, customers, or other markets; (b) the seller will, or is likely to, purchase the products the buyer produces or grows; (c) the buyer will, is likely to, or can earn more than the buyer pays to the seller; or (d) the seller will refund all or part of the buyer’s investment if the buyer is dissatisfied.

Although the requirements applicable to business opportunities as defined under the FTC Rule are the same as those applicable to franchises under the Rule, the business opportunity and seller assisted marketing plan laws in the 25 state laws typically impose registration and disclosure requirements that are less onerous than those applicable to franchises but also frequently control the substantive terms of the relationship and impose bonding requirements.

Federal Trade Commission Rule Definition.

“(A) A person … offers, sells, or distributes to any person other than a `franchisor’ … goods, commodities, or services which are:
(1) Supplied by another person (hereinafter ‘franchisor’) or
(2) Supplied by a third person … with whom the franchisee is directly or indirectly advised to do business by [the 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 good, 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 good, commodities, or services, or
(3) Provides to the franchisee the services of a person able to secure the retail outlets, account, site or locations …; and
(2) 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 franchise.” (Note that the Rule exempts payments that total less than $500 made at any time up to months after commencing operation of the business.)

State Business Opportunity or Seller Assisted Marketing Plan Statutes–The Nebraska Example.

“Seller-assisted marketing plan shall mean the sale or lease or offer for sale or lease of any product, equipment, supplies, services, license, or any combination thereof which will be used by or on behalf of the purchaser to begin or maintain a business when:
(1) The seller of the plan has advertised or in other manner solicited the purchase or lease of the plan;
(2) The purchaser makes or will become obligated to make a total initial payment of an amount exceeding five hundred dollars; and
(3) The seller has represented directly or indirectly or orally or in writing that:
(a) The seller or a person recommended or specified by the seller will provide the purchaser with or assist the purchaser in finding locations for the use or operation of vending machines, vending routes, display racks, display cases, or other similar devices on premises neither owned nor leased by the seller of the purchaser;
(b) The seller or a person recommended or specified by the seller will provide the purchaser with or will assist the purchaser in finding outlets or accounts for the purchaser’s products or services;
(c) The seller or a person specified by the seller will or is likely to purchase any or all of the products made, produced, fabricated, grown, bred, or modified by the purchaser using, in whole or in part, the products, supplies, equipment, or services which were initially sold or leased or offered for sale or lease to the purchaser by the seller;
(d) The purchase will, is likely to, or can derive income from the business which exceeds the initial payment paid by the purchaser for participation in the plan;
(e) There is a market for the product, equipment, supplies or services which were initially sold or leased or offered for sale or lease to the purchaser by the seller;
(f) The seller will refund all or part of the initial payment paid to the seller or will repurchase any of the products, equipment, or supplies provided by the seller of a person recommended or specified by the seller, if the purchaser is dissatisfied with the business; or
(g) The seller or a person recommended or specified by the seller will provide advice or training pertaining to the sale of any products, equipment, supplies, or services or use of any licensed material and the advice or training includes, but is not limited to, preparing or providing (i) promotional literature, brochures, pamphlets, or advertising materials, (ii) training regarding the promotion, operation, or management of the seller-assisted marketing plan, or (iii) operational, managerial, technical, or financial guideline or assistance.”

The Nebraska statute has very inclusive regulatory definitions. But business opportunity laws generally apply wherever locations or accounts are provided or suggested either by the seller or a source it refers or identifies and the represents that the buyer will make money or receive a refund from the seller.

3.0 APPLYING THE DEFINITIONS: IDENTIFYING TROUBLESPOTS.

3.1 The unique meaning of “prescribed” or “required”.

Despite the seemingly plain meaning of the words “required” and “prescribed” which are part of the definitional elements in most franchise and many business opportunity statutes, courts and regulators have not given those term a strict meaning. Instead, franchise and business opportunity laws have been held to apply where actual use or expenditure occurs because of practical necessity or desirability. The fact that use of a particular method or procedure suggested by the manufacturer is so desirable or so pervasive throughout the distribution system can be the basis for a finding that it is required or prescribed.

3.2 Significant control or assistance; marketing plan or system or community of interest.

If the licensee relies on the licensor’s business expertise to assist in the operation of the business or if the licensor has a right to dictate or advise the licensee on significant aspects of the business operations, the “significant control or assistance” element of the FTC Rule may be satisfied. Similarly, a finding of a community of interest or presence of a marketing plan or system can be based upon the manufacturer’s right to control or advise regarding operational or managerial aspects of the business.

Centralized management and uniform standards are hallmarks of the existence of a franchise.Under many state laws, the fact that separately owned and operated businesses all appear to be part of a single chain can be the basis for a finding of the existence of a marketing plan or system or a community of interest.

Some contractual provisions commonly found in license agreements that may inadvertently fulfill these requirements include:

• specified production techniques
• required accounting practices, procedures, or methods
• personnel requirements
• providing or designating promotional materials or advertising
• system wide promotional campaigns
• restrictions on customers
• locations or sale area restrictions
• training programs, courses, or manuals
• management advice or direction
• marketing assistance or controls
• providing operating manuals with general business advice or controls
• price controls
• restrictions on or designation of payment or credit terms or practices
• designating warranties and representations to be made to customers
• detailed instructions for product or service presentation
• designated or suggested advertising materials or programs, signs, sales pitches, sales kits, sales aids, films, demonstration kits
• required or permitted use of certain suppliers
• required use of particular fixtures or equipment

3.3 Franchise Fee.

The definition of the term “required fee” quite frequently has been found to include expenditures that are a practical necessity. For example, if certain equipment is required to produce the goods and that equipment can only be obtained from the licensor or its affiliate, there could be a basis for finding that a franchise fee has been paid.

Although payments for reasonable amounts of inventory purchased at bona fide wholesale prices are generally exempted , required purchases of goods for which there is no determinable bona fide price or that are not required to fulfill the purpose of the contract or that must be purchased in quantities greater than required to meet resale or production needs can all form the basis for finding that a franchise fee has been paid.

Under state statutes, it is not uncommon for a finding that a franchise fee has been paid to be based upon:

• rental payments for real property or equipment
• deposits
• training fees
• real estate acquisition costs
• performance fees
• set up fees
• advertising fees
• bookkeeping charges
• purchase price for sales kits, brochures, programs, fixtures, equipment, display cases, tools, supplies, linens, utensils, and other necessary or desirable goods

3.4 Providing Locations or Accounts and Other Business Opportunity Law Elements.

Some things that frequently trigger inadvertent coverage under business opportunity or seller assisted marketing plan laws include:

• Providing lists of suggested or existing customers or accounts
• Making projections or claims about potential earnings or profits
• Site or facility approval rights or requirements
• Inventory buy-back provisions

4.0 THE CONSEQUENCES.

Here is the real reason you should care: the Federal Trade Commission and 16 states regulate the offer and sale of franchises in much the way that sales of securities are regulated. Although these statutes are described as merely disclosure and review statutes, in practice they have come to regulate some of the substantive terms of the agreement between licensor and licensee.

These state statutes prohibit the offer or sale of a franchise without registration or, in some cases, notice filing with the applicable state regulatory authority.

Similarly, 25 states regulate the offer and sale of business opportunities without advance filing of a disclosure document with the state and delivery of that document to the offeror a number of days in advance of the execution of an agreement or payment of any money. These statutes also commonly require posting of a bond.

So if a license agreement you prepare is subsequently determined to be a franchise or a regulated business opportunity, your client could be subject to a plethora of statutory remedies that include recision rights, civil damages, regulatory cease and desist orders, fines, and penalties.

The recent case of Beverly Hills Concepts, Inc. v. Schatz & Schatz, Ribicoff & Kotkin (N.J. Superior Court 1997) CCH Business Franchise Guide Paragraph 11,099 provides an alarming and instructive example. This was a legal malpractice case brought by a marketer of health and fitness business opportunities. Apparently relying on the client’s statement that it had filed a federal trademark registration application, the lawyers advised the client that it did not have to register under the Connecticut business opportunities law.

The plaintiffs in this case sold two different line of fitness businesses: (i) they sold directly to investors the right to open a fitness center using their name and system; and (ii) they sold distributorships to established fitness centers which were given a territory in which they had the exclusive right to sell the plaintiff’s products and sublicense use of its name. The distributors had the right to sell equipment packages to others starting fitness centers and to license those operators to use the plaintiff’s name and logo. The distributors received a marketing support package including all of plaintiff’s manuals and marketing materials.

The agreement with its distributors required the plaintiff to provide promotional, sale and technical information; to advise distributors regarding pricing standards; and furnish field training and merchandising assistance in national programs in which the distributor was required to participate. These requirements are not unlike those commonly found in license agreements.

Having found that the plaintiff’s business arrangement was clearly regulated by the Connecticut Business Opportunity Act and was not exempt because its federal trademark registration was pending, not effective, the court also found that the attorneys’ malpractice was the proximate cause of the ruination of the plaintiff’s business and awarded damages just under $16 million dollars.

Federal Trade Commission Advisory Opinion 94-2 issued February 14, 1994 and reported at Commerce Clearing House Business Franchise Guide Paragraph 6458 is an example of a regulatory determination that a license agreement constituted a franchise. The licensor entered into agreements with trade schools that would instruct in the use of “drawright” software produced by the licensor. The licensor required that the licensee trade schools (i) provide a marketing plan; (ii) attend and pay for seminars; (iii) comply with minimum site selection standards; (iv) limit associations with other computer software or hardware sales groups; (v) produce a marketing brochure and mailing; (vi) adhere to minimum curriculum standards; (vii) use materials supplied by the licensor; (viii) have certain qualified employees; (ix) require that employees adhere to the licensor’s policies and procedural manual; and (x) pay a discounted amount for software.

Licensees were permitted, but not required, to use the licensor’s trade name and marks. However, if a licensee chose to use the trade name or marks, the licensee was required to state that it was an “Authorized … Training Center” for the software and that “Authorized … Training Center for [the software] is an educational program managed by” the licensor.

The Commission found that because the trade schools were permitted to instruct students in the use of the software, the trade schools would perform a service identified with the licensor’s trademark or trade name and the first definitional element of a franchise existed. The Commission noted what it described as the clear intention that the trade schools benefit from that association and the fact that the public would readily associate the trade schools with the licensor’s software.

The Commission then noted that the license agreement imposed “multiple restrictions” on the trade schools that affected “almost every facet of the trade schools business. The Commission concluded that because these restrictions were so pervasive, it could reasonably conclude that these controls were significant.

5.0 STATE LAWS REGULATING THE FRANCHISEE-FRANCHISOR RELATIONSHIP

Eighteen states, the District of Columbia, Puerto Rico, and the Virgin Islands have laws that limit a franchisor’s right to terminate or refuse to renew a franchise or withhold consent to the transfer of a franchise. A list of those laws is at Appendix 3. Falling within the purview of these laws is an important consequence of a finding that a license agreement is a franchise.

5.1 Termination or Nonrenewal.

The statutes that restrict termination or nonrenewal typically include three types of requirements.

1. Notice Requirements–and sometimes an opportunity to cure. Termination statutes almost uniformly condition termination of the franchise on the giving of prior notice including a statement of the precise reason for termination. Notice requirements are generally for 60 to 90 days.

2. “Good Cause” Requirements. Most relationship statutes also prohibit termination except for statutorily defined “good cause”. Typically “good cause” includes: (a) failure to comply with requirements imposed in a nondiscriminatory manner; (b) failure to act in good faith and a commercially reasonable manner; (c) abandonment of the franchised business; (d) conviction of a felony; (e) conduct that impairs the franchisor’s marks or name; (f) insolvency or commencement of bankruptcy proceedings; and (g) loss of the right to occupy the business premises.

3. Compensation and Repurchase Requirements. Less typical but not uncommon are state law provisions conditioning termination on repurchase of certain assets of the franchised business or compensation for goods, fixtures, or equipment used in the business. Under some state statutes these requirements are imposed only if the franchise is terminated without good cause, but under others a franchisor is always required to repurchase certain assets. The assets that are frequently the subject of repurchase obligations include inventory, supplies, equipment, furnishings, and fixtures.

There are three basic types of transfer laws. One type deems consent to have been given if the franchisor does not disapprove the proposed transferred and provide material reasons for the disapproval within 60 days after approval is requested. A second type requires “good cause” (such as the transferee’s relationship with a competitor, the transferee’s inability to comply with the franchise agreement, or the existence of an uncured default under the franchise agreement) for any refusal to consent. The third type of statute simply prohibits the franchisor from acting unreasonably.

The operative provisions of the New Jersey Franchise Practices Act are a good example of statutes of this kind.

“Sec. 5. It shall be a violation of this act for any franchisor directly or indirectly through any officer, agent, or employee to terminate, cancel, or fail to renew a franchise without having first given written notice setting forth all the reasons for such termination, cancellation, or intent not to renew to the franchisee at least 60 days in advance of such termination, cancellation, or failure to renew, except (1) where the alleged grounds are voluntary abandonment by the franchisee of the franchise relationship in which event the aforementioned written notice may be given 15 days in advance of such termination, cancellation, or failure to renew; and (2) where the alleged grounds are the conviction of the franchisee in a court of competent jurisdiction of an indictable offense directly related to the business conducted pursuant to the franchise in which event the aforementioned termination, cancellation or failure to renew may be effective immediately upon the delivery and receipt of written notice of same at any time following the aforementioned conviction. It shall be a violation of this act for a franchisor to terminate, cancel or fail to renew a franchise without good cause. For the purposes of this act, good cause for terminating, canceling, or failing to renew a franchise shall be limited to failure by the franchisee to substantially comply with those requirements imposed upon him by the franchise.

Sec. 6. It shall be a violation of this act for any franchisee to transfer, assign or sell a franchise or interest therein to another person unless the franchisee shall first notify the franchisor of such intention by written notice setting forth in the notice of intent the prospective transferee’s name, address, statement of financial qualification and business experience during the previous 5 years. The franchisor shall within 60 days after receipt of such notice either approve in writing to the franchisee such sale to proposed transferee or by written notice advise the franchisee of the unacceptability of the proposed transferee setting forth material reasons relating to the character, financial ability or business experience of the proposed transferee. If the franchisor does not reply within the specified 60 days, his approval is deemed granted. No such transfer, assignment or sale hereunder shall be valid unless the transferee agrees in writing to comply with all the requirements of the franchise then in effect.

Sec. 7. It shall be a violation of this act for any franchisor, directly or indirectly, through any officer, agent or employee, to engage in any of the following practices:

a. To require a franchisee at time of entering into a franchise arrangement to assent to a release, assignment, novation, waiver or estoppel which would relieve any person from liability imposed by this act.
b. To prohibit directly or indirectly the right of free association among franchisees for any lawful purpose.
c. To require or prohibit any change in managment of any franchisee unless such requirement or prohibition of change shall be for good cause, which cause shall be stated in writing by the franchisor.
d. To restrict the sale of any equity or debenture issue or the transfer of any securities of a franchise or in any way prevent or attempt to prevent the transfer, sale or issuance of shares of stock or debentures to employees, personnel of the franchisee, or heir of the principal owner, as long as basic financial requirements of the franchisor are complied with, and provided any such sale, transfer or issuance does not have the effect of accomplishing a sale of the franchise.
e. To impose unreasonable standards of performance upon a franchisee.
f. To provide any term or condition in any lease or other agreement ancillary or collateral to a franchise, which term or condition directly or indirectly violates this act.”

6.0 WHAT YOU SHOULD DO.

THE DISCUSSION IN THIS PAPER AND THE CHECKLISTS THAT FOLLOW ARE CONDENSED AND ABBREVIATED PRESENTATIONS OF COMPLEX QUESTIONS THAT REQUIRE DIFFICULT BUT CRUCIAL JUDGMENT CALLS. IF YOU HAVE ANY DOUBT ABOUT WHETHER THE PROVISIONS OF THE LICENSE AGREEMENT COULD TIP THE BALANCE INTO A REGULATED AREA, IT WOULD BE PRUDENT TO CONSULT COUNSEL WITH SPECIAL EXPERTISE IN THIS AREA.

Because regulation can be so pervasive, it is a good practice to counsel every client for whom you are preparing a license or distribution agreement about franchise and business opportunities laws, the common definitional elements, and the potential trouble spots. Then explore carefully with the client not only what should be in the contract, but also what happens in the real world.

Examine all the proposed provisions and question the client in detail about what will happen as a practical matter. Explore all actual or potential marketing practices and restrictions. Does the client go beyond the call of duty and provide services, assistance, oversight, or training that could be used against it by a disgruntled licensee, dealer, or distributor? Are dealers or distributors required to purchase extra goods or products or expend money other than for the purchase of a reasonable quantity of goods at bona fide wholesale price?

A checklist of areas to discuss and explore might include:

Fee–Every source of revenue is suspect. Explore every payment the licensee, dealer, or distributor makes to your client or an affiliate of it.

Assistance and training–Are there operating manuals, training courses, instruction sheets or sessions, visits to make suggestions or provide assistance, telephone consultations?

Advertising and promotion–Does your client provide brochures, sales kits, samples, marketing campaigns?

Bookkeeping and accounting–What controls does your client impose? What systems does your client require or provide?

Things to avoid include:

Restrictions on or specifications of the appearance of the licensee’s business premises or staff

Imposition of particular accounting practices or systems

Controls on or designation of hours of operation

Personnel requirements or specifications

Provision of promotional or advertising campaigns

Customer specification or limitations

Designation of exclusive or limited territories

Training programs

General business advice, assistance, or training

Operating manuals or procedure guides that include general business procedures, methods, advice, or controls

Customer or account referrals or lists of prospects

To the maximum extent practicable, encourage your client to limit the number, scope, and content of restrictions it imposes. Propose use of the least burdensome provision practicable and explain to your client why that provision should be used instead of a stronger but more dangerous one.

Limited provisions that focus on protection of intellectual property rights can usually be defended against a claim based upon franchise and business opportunity laws. Narrow controls directed quite strictly at quality control premised on Lanham Act requirements and training required to permit usage of a patented method or product are not generally successfully used as the basis for a claim that a license agreement is a franchise or business opportunity, so long as they are not combined with a multiplicity of provisions directed at controlling or dictating business operating techniques.

Provisions that are quite general, restrictions or requirements that are customary in the particular trade or business (for example, carrying liability insurance or maintaining sales records) may not result in coverage, but the onus will be on your client. Obtain support and document in your file how these provisions are common in the relevant trade or business.

In the agreement itself spell out thoroughly how the restrictions that are in the agreement relate and are limited to those required to protect the integrity, quality, and functionality of the product; relate them specifically to the Lanham Act quality control requirements. It is generally safe to impose controls on mark usage to protect the licensor’s mark ownership and goodwill–but the line can be crossed easily.

Limited training in the unique aspects of the licensed product or service or the particular market for it is generally not enough to cause an agreement to fall within the purview of franchise and business opportunity laws. But here, too, contractual and practical arrangements must be considered in context to evaluate the risk of an unintended result.

It is not uncommon to impose standards or specifications regarding the display of the goods or services. But the pervasive definition of a regulated business opportunity mandates extreme caution in this area. It is especially important that provisions be as narrow and limited as practicable.

Requirements imposed solely to assure quality and uniformity of goods or to comply with governmental requirements should not result in coverage. But the line can blur easily, so all the facts and circumstances must be considered and proof that a less onerous provision would not have accomplished the purpose is always desirable.

It is also not uncommon for the licensor to provide point of purchase promotional materials, sales kits, and/or product samples to assist with the sale of the licensed goods or services. Here, too, the line is quite fine and liability may arise not only because these provisions fulfill the marketing plan or community of interest elements, but also because they may be the basis for finding a fee was paid. These provisions should be examined carefully in the context of all the provisions and requirements in the license agreement to evaluate how close the arrangement is coming to the applicable legal definitions of franchises and business opportunities.

Caution your client in writing about the dangers of variance between the provisions you have so carefully crafted and verbal instructions or discussions. Actual practice can undercut the value of the written agreement and produce disastrous consequences.

Finally, consider whether the tail is wagging the dog to such an extent that regulatory compliance would be preferable to accomplish business goals, maximize flexibility, and minimize risk.

7.0 STATE DEALER AND DISTRIBUTOR LAWS.

Many states also regulate the termination of a dealer or distributorship agreement. These statutes are designed to prevent a licensor from using a dealer or distributor to establish a market and then deprive the dealer or distributor of that market. These statutes are listed in Appendix 4.