Is Your Cannabis Business Really a Franchise? FTC May Say Yes

The difference between entering into a Cannabis Franchise vs. A Standard Licensing agreement is monumental.

Launching a business in the cannabis industry necessarily means navigating through and ultimately deciding upon a wide variety of complex and nuanced decisions. Because of Cannabis’s frustratingly persistent Federal illegality, the outcome of a poor decision may be very severe indeed. One such decision tree involves the choice to expand one’s cannabis company under a Franchise framework or a more simple and linear licensing deal. This article will explore the basic scenario under-which these options may be presented but as each case is fact specific, contact a Marijuana Lawyer to walk you through your own idiosyncratic situation.

Cannabis Franchising vs. Cannabis Licensing

Larger and more established marijuana companies have several options available to them to expand brand recognition and enlarge their public image through a proxy company. Principally, cannabis companies can achieve this objective either in engaging in a licensing agreement or establishing a franchise.

Under the Licensing Agreement, the Cannabis licensor will allow the cannabis licensee to sell various cannabis goods and products under the brand name or trademark of the licensor. In exchange, the licensee will pay the licensor a fee (fixed or variable according to the earned profits). Conversely, in a franchising agreement, the Cannabis franchisor provides a much more robust and established system for the franchisee (including the branding otherwise provided in the licensing agreement) which will enable the franchisee to immediately start selling to products. Here, the franchisee is not merely renting the franchisor’s brand name but is actually acting as an extension of the franchisor. In exchange, the franchisee typically compensates the franchisor with an initial buy-in fee in addition to monthly payments that will again either be fixed or variable.

Cannabis Companies and Unintended Franchising

As can be imagined, distinguishing a true licensing deal from a bona fide franchising arrangement can be challenging. However, the difference between these two structures is in fact immensely significant and implicates various Federal and State governing agencies. Without proper guidance, a marijuana business owner who thinks he is operating as a licensee may in fact be working as a franchisee. This scenario, of accidental but in-fact franchising, is typically characterized as “unintended franchising.” More precisely, the (believed-to-be) licensee allows his company to do far more than fly the banner of the licensor/franchisor – instead, this proxy company increasingly begins to operate under the guidance, direction, and control of the master company.

Why does this matter? Well, as it turns out, the Government views the Franchisee arrangement as one that calls for much greater oversight and compliance than a straightforward licensing deal.

Franchises and the U.S Federal Trade Commission (FTC)

All franchises are controlled and regulated by the U.S. Federal Trade Commission (FTC) and other state agencies. The FTC rules with an iron fist and has established three essential benchmarks which constitute a franchise.

According to FTC regulations, there are three elements to a franchise:

  1. The franchisee obtains the right to develop and distribute goods/services that bear the franchisor’s trademark;
  1. The franchisor will exerts or possess the authority to exert a significant degree of control over the franchisee’s operation and/or provide significant assistance in the franchisee’s method of operation; and
  1. The franchisor collects stipulated payments from the franchisee in exchange for the franchisee’s right to operate the business.

The FTC’s guidelines really are tricky because of its emphasis on the right to use the franchisor’s trademarks and the seeming lack of distinction between the franchisee’s use of a trademark and the licensee’s use of a trademark. Ultimately, the fundamental difference between licensing and franchising is CONTROL. If the franchisor/licensor has significant control over the nature and methodology of the business operation of the franchisee/licensee (which products can be sold, when/where can they be sold, what form of advertisements can be used etc.), the FTC will view this deal as a franchise rather than a licensing agreement.

Various Government Bodies REALLY DO CARE

Entering into either a licensing deal or franchising arrangement are both complicated procedures and should not be done without a full understanding the various laws and governing bodies which - like it or not - are involved. Consulting with a marijuana law firm is a great way to make sure you’re in the best position possible to make good choices for your business. Some state laws have been put in place to make sure any failure to follow the agreement will result in onerous financial consequences. Companies that run afoul of their duties may inevitably pay damages to the FTC, the franchisee, and or the state. Ultimately, the takeaway message is that an intended licensee (rather than franchisee) should have enough control over its own business practices that it doesn’t feel trapped by the licensor.

Comments

Stories