Your (brand) name in lights: unraveling the legal implications of becoming a franchisor.

• Author: Spendlove, Gretta
• Position: Legal Brief

Howard-Johnson. Jenny Craig. Carl's Jr. Mida. All are brand names that have become household words. The very strength and familiarity of the brand name alone makes large profits for the companies that franchise the brand and its products.

Utah companies are also jumping on the franchise bandwagon. For instance, Tunex sells car care franchises and Rumbi's Island Grill sells restaurant franchises. Both are headquartered in the Salt Lake City area.

How do companies make money by authorizing others to use their names and sell their products? Imagine GreenPro, a mythical garden care company that provides landscaping advice to home and business owners. If they want to start a franchise, they'll need to start at the Utah State Office of Consumer Protection and the U.S. Federal Trade Commission (FTC), the agency that determines which businesses can franchise.

What Laws Apply

Franchises are heavily regulated by both the FTC and state law. If GreenPro falls within the definition of "franchise" for purposes of those statutes, it will need to provide a disclosure statement to potential investors, complete filings with state agencies and meet strict requirements regarding refunds, earnings claims and other matters.

The FTC uses a three-part test to determine which businesses must comply with the franchise rules. First, the franchisor (seller of the franchise) offers the franchisee (buyer of the franchise) the right to distribute goods or services that bear the franchisor's trademark, trade name or other commercial symbols. Second, the franchisor exercises significant control over, or offers significant assistance in, the franchisee's method of operation. Finally, the franchisee pays the franchisor at least $500 for obtaining the franchise. There are some exceptions to the definition, such as employer-employee and general partnership arrangements and single trademark licenses.

Let's imagine GreenPro has a catchy name and logo that it plans to offer to its franchisees. To protect the value of its name and product, GreenPro will require franchisees to contribute to and participate in a common advertising campaign, and to provide landscaping and lawn care services according to a certain procedure and schedule. GreenPro plans to charge $10,000 to each franchisee and its managers will occasionally inspect franchisees' business operations. By comparing GreenPro's business plan to the FTC description, it's apparent that the FTC would define GreenPro's plans as...