Creative Representation | Expert Litigation

It May Not Be A Franchise But It May Be A Seller Assisted Marketing Plan

by Darryl Hart

July 26, 2017 – As noted in my previous blog post, to be considered a franchise in California an arrangement has: (a) the grant of the right to do business; (b) under a “marketing plan or system” prescribed in substantial part by the franchisor; (c) association with the franchisor’s name, mark, symbol, advertising or something else that identifies the franchisor and (d) a “franchise fee”, which is just about any payment to the franchisor.  Some people try to avoid being a franchise by trying to have the grantee operate without one of the elements.  Most don’t want to forego the fee so they think that they can allow the grantee to use less than the grantor’s complete business system and avoid the “marketing plan or system” element or permit use of the system and prohibit the use of any means of identifying the grantor.  However, problems exist with both of these approaches.

Federal trademark law requires a trademark owner to control what is sold under the mark so that the mark identifies the source, nature and quality of the goods or services offered (a mark identifying only services is called a “service mark” but I will refer to both as a “trademark”, or just “mark”).  If a license is granted to use a mark the licensor must maintain control over what is sold, or what goes on in the case of a service, under the mark.  If sufficient rights and controls are not maintained by the licensor, what is called a “naked license” may result.  If the license is considered a naked license, the licensor can use its right to the mark and others can use the mark without the licensor being able to prevent that use.  As such, cutting too many controls by a trademark owner seeking to avoid being a franchisor can result in the loss of a mark.  Not a good result.

Since it is unwise to chip away at the “marketing plan or system” element of a transaction in which a trademark is licensed, some try to avoid being a franchise by not licensing a trademark, or other identification, as part of the transaction.  While this can get tricky because of a couple of California cases which I will discuss in a later post, one must be careful in the event the transaction, while avoiding being considered a franchise, may fall under the California Seller Assisted Marking Plan (“SAMP”) law, California Civil Code Sections 1812.200 through 1812.221.  In other states this type of law is often called a Business Opportunity (“BisOp”) law.  The Federal Trade Commission also has a rule covering business opportunities in addition to its rule on franchises.

“Seller assisted marketing plan” means any sale or lease, or offer to sell or lease, any product, equipment, supplies or services which requires a total initial payment exceeding $500 but less than $50,000 which will aid a purchaser, or will be used by or on behalf of the purchaser, in connection with or incident to beginning, maintaining or operating a business when the SAMP seller has advertised or in other manner solicited the purchase or lease of the SAMP and done any of the following:

  • Represented that the purchaser will earn, is likely to earn or can earn an amount in excess of the initial payment made by the purchaser;
  • Represented that there is a market for the product, equipment, supplies or services, or any product marketed by the user of the product, equipment, supplies or services sold or leased, or offered for sale or lease, to the purchaser by the seller, or anything, tangible or intangible, made, produced fabricated, grown, bred, modified or developed by the purchaser using, in whole or in part, the product, supplies, equipment or services which were sold or leased or offered for sale or lease to the purchaser by the seller of the SAMP; or
  • Represented that the seller will buy back, or is likely to buy back, any product made, produced, fabricated, grown or bred by the purchaser using, in whole or in part, the product, supplies, equipment or services which were initially sold or leased or offered for sale or lease to the purchaser by the seller of the SAMP.

You can see that most franchises will fall under this law as well as under the laws regulating franchises.  However, the states with SAMP/BisOp laws provide for an exemption for franchises that meet certain criteria.  In California, the criteria for SAMP exemption is that a franchise is registered with the Department of Business Oversight under the California Franchise Investment Law (“CFIL”).  This can result in double trouble for the seller of an unregistered franchise since they will probably have violated both the SAMP law and also the CFIL.

Obviously, there is a lot of stuff going on when you permit a third person or entity to use your mark or help them get into, or maintain, a business.  Before doing either think “franchise or SAMP”.  Don’t try to cut it too thin since the penalties for being wrong can be significant, including criminal and civil penalties (fines).

This blog contains the personal view of the author and is not intended to be legal advice for any specific situation.