The Accidental Franchise

by Anthony J. Spotora, Esq.

A friend of mine tells me that his favorite legal word is, “allegedly”.

He uses the word frequently and always with an appropriate dose of sarcasm. Of course, most people know what this word means.

Another friend has teased me about the legal language of “legalese” since I was in law school and regardless of the conversation, she will interject, “Habeas Corpus!”

Typically, it invokes laughter. . . but unlike the word “allegedly”, a lot of people have no idea what it means.

So, have you ever had a conversation with your lawyer about an important matter, gotten off the phone and, although you (hopefully) felt better, you paused for a moment and wondered, “what the hell did he just say?”

As it would go, some clients find their occasional lack of interpretation to be perfectly acceptable. The way they see it, they are paying their counsel to understand something so they don’t have to. We’ll call them the, ‘getting what they pay for’ group.

However, there are at least 2 other groups of clients. The first type is made up of persons that genuinely want to understand how the law applies to their current needs to the best of their ability and; the second type is made up of members of the ‘getting what they pay for’ group after they’ve received a surprising invoice. Now, as you might imagine, they seek a better understanding.

So, for all you expansion-minded business owners out there, how about the term, “accidental franchise”; do you know what that means? Well, perhaps you should.

Accidental franchises are the common result of entrepreneurs who are looking to expand their businesses by means of licensing arrangements.

What they believe amounts to granting certain rights to others via a licensing contract or similar agreement, with hopes of broadening their name, product and/or service awareness, and of course, their bottom-line, can actually result in a franchise. . . albeit, accidentally.

(cont. from e-newsletter) To many, significant is the fact that you do not get to choose your desired course (licensing v. franchising) if franchise elements have been met – accidentally or not. In other words, the California Department of Corporations will care little that you didn’t intend to franchise, but that it just sort of happened. And, amongst other things, you’d be wise to know that there are hefty penalties assessed by the State for those who establish accidental franchises.

Now, on the surface, a franchise might sound more impressive than a licensing arrangement; however, the laws and obligations related to a franchise may be much more than you bargained for.

California law defines a franchisor as:

1. One who offers, sells, or distributes trademarked goods or services;
2. Through one or more “substantially associated” business enterprises; and
3. Follows a marketing plan “prescribed in substantial part” by the franchisor;
4. In exchange for fees collected directly or indirectly from the associated business
enterprise(s).

What does “substantially associated” mean? The franchisee uses the franchisor’s trademark and/or advertising slogans to identify its business.

What does “prescribed in substantial part” mean? The franchisor provides the franchisee advice and training, retains significant control over the conduct of the franchisee’s business, grants the franchisee exclusive rights to operate in a given territory, or requires the franchisee to purchase or sell a specified quantity of the franchisor’s goods or services.

So, although many business owners desire the less rigorous road of licensing arrangements over franchising; remember, if it looks like a duck and it quacks like a duck, it’s a franchise!

Therefore, while a franchise can be a highly effective way to expand your business, it is to the entrepreneur’s benefit to avoid establishing one by accident.

And for those of you really paying attention, “Habeas Corpus” refers to a legal action whereby prisoners seek to come before the court so that it may determine if they have been unlawfully imprisoned and should be released.

So, let’s start at the top of the pyramid => what is “Intellectual Property”? Besides being a very subjective area of law, it is, in fact, just what it is claimed to be => the property of one’s intellect or. . . the possessions of one’s mind; better known to most as, “ideas”.

However, and arguably one of the most important legal principles associated with intellectual property is the fact that, an “idea”, alone, is not “property” that can be protected until it has been manifested in a tangible form.

Confused by the notion of “manifesting” your idea into a “tangible form”? Well then, write it down. No, seriously. When you put the property of your intellect in writing, you can begin to establish legal rights and protections to it.

Let’s take trademarks for example.

A person or business entity acquires rights in a trademark by either using it in the normal course of business or by filing an application for registration of the mark with the United States Patent & Trademark Office (USPTO). An application for registration may be based upon actual use or upon a bona fide intent to use. An application filed with an intent to use, however, will not become a registration until documents evidencing actual use of the mark in interstate commerce are provided to the USPTO. Moreover, and significantly, infringement can only be stopped with actual registration and not with an intent to use or by mere use without registration.

(cont. from e-newsletter) So what about trademark designations? What do they mean and are you entitled to use one?

In the United States, a trademark which has been registered with the USPTO uses the ® symbol. A business that doesn’t actually register a trademark may instead use the common law designation “TM” in superscript next to the mark. Using the “TM” mark does not actually confer any legal rights in federal law, but it may nevertheless help a business acquire secondary meaning concerning a specific mark, in a certain geographical location.

Both registered and non-registered trademarks are eligible for protection under the Lanham Act; but the advantages of having a registered mark are several. For starters, and as mentioned above, one can file a suit for infringement in federal court only if the mark has been registered. Additionally, after five years of unopposed use, the mark becomes “incontestable”. An incontestable mark cannot be attacked on the grounds that it is merely descriptive (even if it is). And even without incontestability, a registered mark has a presumption of being a valid trademark, placing the burden on the plaintiff to attack the defendant’s mark. Furthermore, a registered mark provides rights and protections on a national level and, in some cases, on an international level through what’s known as the Madrid Protocol.

So . . . what will you do with the property of your intellect?

Did you know that, according to Consumer Reports, as many as 66% of all Americans die without a will?

Let’s face it – most of us avoid estate planning.

Perhaps for some it is simply an unpleasant topic to give time and attention to or, perhaps, your loved ones are causing you to skirt around the issue because they rather avoid the topic of your eventual demise.

Whatever the reason, millions of Americans procrastinate and ultimately put this task off at all costs – costs that can be significant in the end to the people you love the most.

Dying without a will means dying “intestate”. “Intestate succession” means the State dictates the division of your property. The State mechanically determines the distribution of your assets based upon whether you were single, married or with a domestic partner. Then, the State simply (or rather, not so simply) goes down its itemized distribution list in chronological order.

As you can imagine, it is highly unlikely that the State will make decisions that will coincide with your personal desires.

Let’s take an unmarried person for example.

If the decedent is unmarried at the time of death, the assets go to the following people, in the following order:

(cont. from e-newsletter)

1. Children, equally. If a child is deceased but had children, the child’s share goes to his or her children equally. If there are two living children and one deceased child who had two children, each living child would received one-third and each child of the deceased child would receive one-sixth (one-half of the third). In some, but not all cases, foster children and stepchildren can inherit from foster parents or step parents.
2. If no living children, to the grandchildren equally.
3. If no living children or grandchildren, to great grandchildren, equally.
4. Decedent’s parents equally, or to the surviving parent if one is deceased.
5. Brothers and sisters equally (half-brothers and half-sisters are considered the same as full brothers and sisters) with provision that if any brothers or sisters are deceased, their share passes to their children equally.
6. Grandparents, equally, or to the surviving grandparents if any are deceased.
7. The descendants of grandparents, such as aunts, uncles and cousins.
8. The descendants of a predeceased spouse (step-children).
9. Parents or the surviving parent of a predeceased spouse.
10. Descendants of the parents of a predeceased spouse, such as a brother-in-law, sister-in-law or that person’s children.
11. The next of kin or nearest relative.
12. The next of kin or nearest relative of a predeceased spouse.
13. If none of the above, to the State of California

As you can see, this process can become relatively confusing and, you should keep in mind that this only touches upon what your loved ones will be forced to endure. Moreover, it only regards YOUR assets. To clarify, you can take title to assets in a variety of ways during your life. For example, in California, it is possible to take title to assets as:

* An individual
* Joint Tenants
* Tenants in Common
* Community Property for Husband & Wife
* Community Property with Right of Survivorship
* Trustee
* P.O.D. (payable on death) with a Named Beneficiary
* T.O.D. (transfer on death) with a Named Beneficiary
* Tenants by the Entireties

Therefore, your asset rights may be shared with others.

Moreover, beyond personal property and, to touch upon but one issue that can manifest with a married person, imagine what can happen to the minor children of parents who are both killed in an accident, yet, no guardian was ever named in a legally recognized document!

So what’s the bottom-line?

Whether it’s a holographic will, a statutory will or a will prepared by a qualified estate planning attorney, life is too short to put off a task that can have such significant results!