We recently discussed some of the most frequently used franchising terms and one concept touched upon was licensing. Licensing is at the core of franchising – but can sometimes be mistaken for it – which is why it deserves its own installment. Let’s review licensing and its role in franchising.
A license is a legal agreement that gives the licensee permission to use the licensor’s intellectual property, such as trademarks, patents, copyrights, or trade secrets. License agreements may also involve the use of technology, brand names, or other intangible assets.
Franchising is a strategy for business expansion whereby one party licenses its trademark or brand name and method of business operation to another party, who uses that name and method in the operation of its business. This business model is often characterized by a standardized and replicable business model that is crucial for success. The purpose behind this is to ensure that a customer will feel receive the same high level of service or products at any location.
Licensing is encapsulated within franchising and there are many similarities and differences, beginning with the nature of their relationships.
The Nature of Relationships
In a franchise relationship, the brand owner allows others to open additional locations under the same name. Though these locations are independently owned, the franchisees are expected to adhere to established standards and practices of the franchise system (and their industry). The franchisor can place certain requirements on franchisees and their business operations.
In licensing, the relationship between the licensor and licensee is generally less involved. The licensor grants specific rights with respect to the licensee’s use of the licensed property but does not exert control over the licensee’s business operations.
As mentioned above, franchisors have more control over various aspects of the franchisee’s business, including branding, operational procedures, suppliers, marketing strategies, pricing and even site selection.
The licensor typically has less control over the day-to-day operations of the licensee. The focus is limited to ensuring that the licensee uses the licensed property in accordance with the terms specified in the agreement.
When it comes to fees, there are many similarities.
Franchisees typically pay both initial fees (for the right to join the franchise) and ongoing royalties. The franchisor may also provide ongoing support, training, and marketing assistance.
Licensing arrangements often involve the payment of royalties or fees by the licensee to the licensor. These fees may be a flat fee, a percentage of sales, or another agreed-upon structure.
The FDD and the Franchisor’s Intellectual Property
As discussed in prior Insights, franchisors are required to provide prospective franchisees with their Franchise Disclosure Document (FDD) and may be required to register the FDD in applicable states. The FDD will identify the franchisor’s intellectual property that will be licensed to franchisees.
For example, FDD Item 13 identifies the franchisor’s trademarks that the franchisee will use in operating its franchise; Item 14 addresses the franchisor’s patents and/or copyrights.
Licensing terms are embedded in all franchise agreements and strengthen relationships among parties when the license and branding are appropriately used.
Licensing ≠ Franchising
Despite any similarities, franchise stakeholders need to rememember that licensing and franchising are not the same. Those seeking to create a licensing arrangement should be careful to ensure that they do not inadvertently create a franchise relationship. This is a scenario we will discuss in an upcoming installment of Insights.
A qualified NY franchise lawyer can help franchisors/licensors and franchisees/licensees make strategic decisions regarding which relationship makes the most sense for their business relationship.
Contact Lusthaus Law
Lusthaus Law’s website is a resource for New York franchisors and franchisees. We have published two downloadable and complimentary e-books and our Insights blog is regularly updated to reflect industry trends and recent achievements in client representation.
Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path for your franchise’s successful future.