Does your collaborative organization fall under the Franchise Act?

The Franchise Act has been in effect since January 1, 2021, but when does an organization fall under the Franchise Act? Before the Franchise Act, labeling an organization didn't have many consequences, as there was no franchise legislation. The Franchise Act has changed this. If the word "franchise" is mentioned in the agreement, an organization will fall under the Franchise Act. However, it goes much further than that. The Explanatory Memorandum states the following:

"This bill applies to all types of franchises, regardless of how the parties themselves characterize their partnership."

No use of the term "franchise," yet a franchise formula nonetheless

So, a formula that, for example, chooses terms such as "partners" or "collaboration agreement" to avoid franchising will in many cases also fall under the Franchise Act. In other words, if something looks like a duck, swims like a duck, and quacks like a duck, it probably is a duck. But when does an organization fall under the Franchise Act?

Definition of a franchise formula in the Franchise Act

The Franchise Act includes the following definition of a franchise formula:

“An operational, commercial, and organizational formula for the production or sale of goods or the provision of services, which determines the uniform identity and image of the franchisees within the chain where this formula is applied, and which includes at least:

1. A trademark, model, or trade name, corporate identity, or drawing
2. Know-how, being a body of practical information not protected by intellectual property rights, resulting from the franchisor's experience and research conducted by the franchisor, which information is secret, material, and identified.”

During the term of a written franchise agreement concluded between the parties for this purpose, the individual franchisee has the right and obligation to use the franchisor's trade name and/or trademark and/or service mark, the know-how (*), the business and technical methods, the working methods, and other industrial and/or intellectual property rights, for direct or indirect financial compensation. owned by the franchisor, supported by ongoing commercial and technical assistance from the franchisor.

In short: Does the organization have a joint trade name, are the entrepreneurs trained in certain knowledge/methods, etc., and do they pay for this? Then the Franchise Act will apply.

Know-how: Secret, Essential, and Identified

The Franchise Act qualifies the know-how in a franchise formula as secret, essential, and identified. But when does this apply? Does a hamburger franchise formula possess know-how that is secret, essential, and identified? The recipes for making a hamburger are no longer secret. These kinds of questions arise if we follow the Franchise Act to the letter.

The court will ultimately have to answer this question definitively. We expect that, if a similar issue is brought before the court, the court will most likely determine that it is a franchise formula. This is because it concerns the franchisor's experience and the transfer of know-how within the overall concept. This is not common knowledge; otherwise, no training would be required upon joining the organization. The overall concept is precisely the foundation of the formula's success. McDonald's is a perfect example.

Still unsure? Then seek clarity!

The Franchise Act is mandatory law. Failure to comply can lead to the annulment of your partnership agreement and other undesirable consequences. Still unsure whether your organization falls under the Franchise Act because of its know-how or otherwise? Then fill out the form below, and we'll discuss whether the Franchise Act applies to you.