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About Franchise Attorney Franchise Expert MBA - Kevin B. Murphy - Mr. Franchise & Former Franchise Owner
Expertise
Franchise Attorney, MBA Franchise Expert, author and instructor with 2-plus decades of franchise industry experience, including ownership of a successful franchise. I answer all business format franchise questions, how to franchise a business, issues about ongoing franchise relationships, buying a franchise, evaluating franchise investments, franchising vs. licensing (franchise vs. license), franchise disputes, franchise operations manuals, franchise expert advice in franchise lawsuits and franchise litigation, franchise agreements, franchise disclosure documents FDD and intellectual property. I don't answer questions about franchises in the automotive and petroleum industries. I have drafted, reviewed and negotiated over 500 franchise disclosure documents, advised hundreds of franchise buyers and franchise companies as well as started and operated a franchise from scratch - a background not duplicated by any other franchise expert. My in-the-trenches franchise ownership and resale experiences gave me valuable insights to share with potential franchise buyers and existing as well as emerging franchise companies.

Experience
Known in the industry as Mr. Franchise, I have owned, operated and sold a very successful franchise in the home improvement industry. I help individuals and companies enter and prosper in the franchise industry, have drafted, reviewed and negotiated over 500 FDD's (Franchise Disclosure Documents) and have experience filing franchise registrations in all franchise registration states such as California, Illinois, New York, etc.

Publications
Author of over 40 franchise articles, including four books on franchising and one book on trade secrets.

Avoiding Legal Pitfalls In Franchise Marketing
2009, Franchise Foundations Press

Franchise Sales Control
2009, Franchise Foundations Press

Effective Franchise Marketing
2009, Franchise Foundations Press

Implementing A Franchise Disclosure Compliance Program
2009, Franchise Foundations Press

Protecting Trade Secrets
2002, Franchise Foundations Press

Also authored foreword and edited various chapters of the following book:

The Franchise Handbook: A Complete Guide to All Aspects of Buying, Selling or Investing in a Franchise
2006, Atlantic Publishing Company

Education/Credentials

B.S. Business Administration (Finance), University of San Francisco,

Juris Doctorate (J.D.) of Law, University of San Francisco School of Law,

Active member of the State Bar of California

Master of Business Administration (M.B.A.) - International Business, San Francisco State University,

Approved Provider of MCLE by the State Bar of California, 1993 to present
Teaching franchise, licensing and intellectual property courses to attorneys

Awards and Honors
Selected as the premier U.S. franchise expert by the World Intellectual Property Organization (WIPO), an agency of the United Nations, in Geneva, Switzerland to speak at Singapore’s World Conference about franchising in Asian countries and developing uniform franchise regulations based on the U.S. franchise laws and regulatory model, September, 2007, hosted jointly by WIPO and the Intellectual Property Office of Singapore (IPOS).

Snapshot of Recent Franchise Expert Litigation Cases:

Nagrampa v. MailCoups Inc. and The American Arbitration Association - United States Court of Appeals for the Ninth Circuit (Argued and Submitted En Banc). Summary: provided franchise expert strategy and consulting in a case that established new franchise law by invalidating the standard arbitration provision in a California franchise agreement on the grounds it was unconscionable.

Swansons Cleaners, et al. (Superior Court jury trial). Summary: provided franchise expert consulting that re-focused the legal issues and discovered new causes of action. Testified at deposition and trial for a franchisee in its claims against the franchise company. Result: jury verdict in favor of the franchisee for $1.6 million in punitive damages and $634,000 in contract, etc. damages.

For more information, visit the Franchise Foundations website

You are here: Experts > Business > Small Business: Canada > Franchising > Illegal Franchise Called A License - Mr. Franchise Weighs In

Franchising - Illegal Franchise Called A License - Mr. Franchise Weighs In

Expert: Franchise Attorney Franchise Expert MBA - Kevin B. Murphy - Mr. Franchise & Former Franchise Owner - 11/1/2009

Question
Hi Mr. Franchise,

A group of us (about 40 or so) bought into a company that was selling a license to train us in operating the business plus we bought almost all our stuff from them also that's sold under their brand. They charged $9,000 for the license and I've paid them about $2,000 plus a month for stuff associated with the business. I've been doing some online research and came across your great article about the franchise vs. license situation and think it applies in my situation.

My question is what can I do to get out of the license and hopefully get some or all of my money back? Would it be a good idea to get some of the others involved also, because I know there are quite a few who are not happy with what's going on. Any idea what something like this will cost?

Thanks for your advice in advance - Beth

Answer

Mr. Franchise - Kevin

Franchise Foundations has a free franchise legal help advice hotline where you can ask a franchise attorney any question. Go to:

http://www.franchisefoundations.com/franchiseattorney.html

Going to the specifics of what you asked, the franchise vs. license issue rears its head more and more common these days. The full (and most current) franchise vs. license article you referenced can be found at the Franchise Foundations website at:

http://www.franchisefoundations.com/franchisevslicense.html

Your situation appears to fit the typical pattern I often see. The company tries to do things on the cheap by calling the contract a license, when it's really a franchise in disguise. They trained you, charged $9,000 and sell you products bearing their mark. Although I would need to look at the case in more detail, from what you have said, it appears the most basic franchise criteria are present.

If others in your group are also unhappy, there is definitely strength in numbers - especially in these types of cases. I'm not necessarily talking about a class action, but more of a group action where costs, etc. can be shared among the group members. Aside from the financial sharing benefit, having a group presents a much stronger bargaining chip. The last thing any company wants to face is a lawsuit that involves selling illegal franchises. And a lawsuit brought by not just a single person, but a group of persons is an incredible nightmare. In addition to high legal defense expenses and more financial exposure, the company also needs to consider the likelihood of a regulatory investigation. If a state or federal agency jumps in to investigate, then their problem escalates to one of epidemic proportions. The group action can become a class action.

But this is putting the cart way before the horse. It may be that all you need to recover all money paid is a good demand letter written by an established and recognized franchise litigator. Having a franchise expert's report to support the demand letter is another strong bargaining chip that needs to be considered.

On the other side, the company that sold you the license will ultimately make an economic decision: what are their chances of losing, how much will it cost them to defend, how much will they have to pay if they lose in money damages and attorneys fees and what are other possible repercussions (others joining in or a regulatory agency investigation, etc.).

Again, I would need to look at your documentation and do an analysis, but it appears you are in the driver's seat from what you relate. The irony here is companies that sell illegal franchises by calling them a license are only shooting themselves in the foot. The marginal savings achieved by doing it the wrong way creates a ticking, legal time bomb of epic proportions. Also, they could only sell you a "license" at $9,000 because the value of a license is considerably less than a franchise. By doing it right to begin with, they could have charged $30,000 to $45,000 as a franchise fee, which would have paid the franchise costs and avoided future franchise vs. license issues. If this goes forward, they're potentially looking at having to refund the $9,000 times the entire network of persons who bought licenses, plus monthly payments, attorneys fees, etc. - all in all, probably $500,000 to $1 million or more. From their perspective, that's not a pretty picture at all.

My advice is to show your license agreement and all pertinent correspondence to a competent franchise attorney - franchise expert. You and others in your group may have significant rights that were violated.

Kevin B. Murphy, B.S., M.B.A., J.D.
Mr. Franchise
FRANCHISE FOUNDATIONS
http://www.franchisefoundations.com/franchiseattorney.html
http://www.franchisefoundations.com/franchiseexpert.html

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