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Distinguishing License Agreements from Franchise Arrangements

Author(s): Dominic Mochrie, Harman Dhillon

October 2014

MGDC Management Group v. Marilyn Monroe Estate, 2014 ONSC 4584 provides some guidance on the distinction between franchise agreements and license agreements. However, the ruling falls short of providing a clear framework for determining whether a license arrangement is subject to the Arthur Wishart Act (Franchise Disclosure), 2000 (Wishart Act), as the decision simultaneously considers two distinct concepts in the Wishart Act – namely whether the “single trade-mark license” exemption applies, and whether there was “significant control” or “significant assistance” in the arrangement to meet the definition of a “franchise.” Nonetheless, the decision still does provide some guidance that is helpful when distinguishing trade-mark agreements from franchise agreements.

Key Facts

The licensor in this case owns the trade-marked name “Marilyn Monroe” (the trade-mark) and licensed the use of this name to the plaintiff licensees for use in their themed restaurants. Subsequent to executing the License Agreement, the licensee brought an application seeking to rescind the License Agreement and damages, claiming that the License Agreement was in substance a franchise agreement for which they had not received a disclosure document, as required by the Wishart Act. The licensor argued that the Act did not apply because the License Agreement was not a franchise agreement, and therefore the disclosure obligations did not apply.

Key Findings

Justice E.M. Morgan granted the licensor’s motion, finding that: (i) the License Agreement fit, in substance and not just in form, “precisely” within the terms of Section 2(3).5 of the Act; and (ii) while a trade-mark license may be one element in a typical franchise agreement, there are many other elements that are hallmarks of a franchise arrangement and that were missing in this case.

An Agreement Between a Licensor to a Single Licensee for a Single License

The Court first examined whether the agreement was exempted from the application of the Wishart Act due to s.2(3).5 of the Act: 

2(3) The Act does not apply to the following continuing commercial relationships or arrangements:

5. An arrangement arising from an agreement between a licensor and a single licensee to license a specific trade-mark, service mark, trade name, logo or advertising or other commercial symbol where such license is the only one of its general nature and type to be granted by the licensor with respect to that trade-mark, service mark, trade name, logo or advertising or other commercial symbol. [Emphasis added.] 

The Court relied on the fact that only a single license had been granted to a single licensee in this case, as the licensor had never granted any other licenses for restaurants or cafes to use the trade-mark. In particular, the Court found that although the licensee stipulated in the Agreement consisted of two corporations, they were in fact one licensee as they:

  • were defined in the License Agreement as a single licensee;
  • had contracted for the trade-mark in their individual and collective capacity; and
  • had common head offices, board of directors and shareholders.

Going Beyond Section 2(3).5 of the Wishart Act: “Elements” of a Franchise Agreement

After having found that the License Agreement did in fact fall within the confines of s.2(3).5 (and should therefore have been exempt from the legislation, including the disclosure requirements), the Court continued its analysis and further considered the “elements” that form the hallmarks of a franchise arrangement. In this part of the analysis, the Court focused on the fact that although the licensor retained the right to control the integrity of the brand, they were not in significant control of, nor did they offer significant assistance to, the licensee’s method of operating the business. The licensee was responsible for developing and operating the business, including elements such as: décor, colour scheme, ensuring quality and uniformity of products and services, crating food and beverage products, advertising and promoting the business, selecting and training franchisees and carrying out all review/audits of their restaurants. The Court reviewed the facts and found no record that the licensor used its contractual rights to dictate to the licensee how to design or operate the business. The Court also noted that the licensor itself did not operate a restaurant and therefore presumably had no guidance to offer.

Also noteworthy is that the Court cited – with apparent approval – an acknowledgement in the License Agreement in which the licensee acknowledged that the Wishart Act does not apply.

While the Court seems to conflate the two concepts – lack of significant control and the single licensee exemption – in determining that the franchise legislation does not apply, the case is still helpful when considering how to frame a trade-mark arrangement to avoid the accidental franchise:

  • Only reserve the minimum rights and obligations required to protect the brand and integrity of the trade-mark.
  • Do not overstep the bounds of the contract by exercising control or offering assistance not contemplated in the agreement.

Part of the October 2014 - Franchise Review

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