Difference Between Licensing and Franchising

TASA ID: 11532

Many businesspeople and professionals think that franchising and licensing are the same, but the fact is that they are different. Given the prevalence of franchising and the interstate, national, and even international scope of so many franchise networks today, attorneys need to know about potentially applicable federal, state, and foreign franchise laws. Franchise sales in the United States are subject to dual regulation at the federal and state level, depending on where the parties reside or do business. The federal franchise sales law, originally adopted in 1978 and overhauled in 2007 regulates franchise sales in all 50 states, including wholly intrastate transactions, per the 2007 version of 16 C.F.R. § 436 (hereinafter “Amended FTC Rule”).


Definition of a License

By the term licensing, we mean a business model in which the licensor grants the right to use intellectual property, brand or to produce a company’s product to strict specification; and, in return the licensee pays ongoing royalties. The licensee company usually either already has the capital assets in place or makes the necessary capital investment to commence its operations. In a licensing business model, the licensor does not exert control over the licensee’s day-to-day business operations.

Definition of a Franchise

Appreciating the need for better guidance for this complex issue, and in an attempt to assist business owners and legal practitioners in determining whether an agreement constitutes a franchise or license, we are providing examples of certain elements of a franchise business model:
According to the California Franchise Law and Federal Trade Commission (FTC) Rule 16 CFR Parts 436 and 437, the four following elements must be present for an agreement to be a "franchise":

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