The success of a particular product or brand can rapidly have large implications throughout the entire commercial world. For instance, the success of one company’s brand may lead to a deal involving the use of that company’s brand by another company for the purposes of cross-promotional advertising or product selling. Whenever a company wishes to utilize a trademark, technology, business model, or other asset of another company, an agreement will nearly always have to be involved. And, depending on the circumstances, that agreement will either have to be a licensing agreement, or a franchise agreement.
In this post, we will provide definitions of each of these agreements, and discuss why a business may need to select one over the other. If a person understands the boundaries of licensing agreements, that person will know why these agreements cannot supplant franchise agreements.
Basics of Licensing Agreements
Licensing refers to a legal arrangement between separate persons with respect to a particular asset. The asset can be a range of things, such as a trademark, technology, recipe, formula, and so forth. In this legal arrangement, the person granting the license – the “licensor” – allows another person – the “licensee” – to use an asset under certain conditions. The licensee agrees to pay the licensor fees based on the use of this asset; this fee is referred to as a “royalty.”
Let’s consider a typical example to illustrate a licensing agreement. A drug research firm develops a formula for a particular drug, which it patents. This research firm then enters into a licensing agreement with a pharmaceutical company to manufacture and sell that drug. The research firm which be paid a royalty fee for the sales made by the pharmaceutical company.
Basics of Franchise Agreements
Franchise agreements are altogether different from licensing agreements. Franchise agreements come about when one company wants to essentially imitate the business model or operations of an established company. The company granting the franchise agreement – the “franchisor” – bestows upon the other company – the “franchisee” – the right to use its trademark or brand, and also maintains the ability to control the operations of the franchisee to some extent. Franchise agreements involve the occurrence of three things: (1) the licensing of a trademark, (2) a certain level of control over business operations, and (3) the payment of an initial fee.
The reason why franchisors retain the ability to control the operations of the franchisee is because this control is necessary to the continuation of the franchisor’s image and brand. Let’s consider a typical franchise example. A fast food restaurant – say, Burger King or KFC – enters into a franchise agreement with a franchisee. Burger King or KFC can control the operations of the franchisee in many ways, including what food is available on the menu, and an initial fee is made.
Central Point: Licenses and Franchises Accomplish Different Goals
When we understand the definitions of these two things, it’s fairly easy to see why licensing agreements cannot supplant franchise agreements. By their nature, licensing agreements are limited in scope; these agreements involve the right to use a specific asset for a certain purpose, and the arrangement between the parties doesn’t extend far beyond this point. Franchise agreements are much more complex contracts which involve control over the activities of the franchisee by the franchisor. These two agreements are meant to accomplish different goals, and come about under different circumstances. If we understand these things properly, there is no reason why these things should ever be confused with each other.
Contact the Trembly Law Firm Today For All Your Licensing and Franchising Needs
Have questions about licensing agreements or franchise agreements? Or do you have a particular case involving a licensing agreement or franchise agreement? If you have, go ahead and give the Trembly Law Firm a call today. We have a team of qualified business lawyers who can listen to your case and plot the best strategy to move forward. Call us today at (305) 431-5678 for more information.