On September 28, 2021, Fox Rothschild partner Craig Tractenberg with Rochelle Spandorf from Davis Wright Tremaine LLP provided perspectives on drafting licenses and distribution agreements respecting the evergreen issue of creating an accidental franchise in a Strafford Publications webinar. They also discussed best practices for complying with federal and state franchise and business opportunity laws once an inadvertent franchise is established.

The topics addressed were:

  • determining whether a business constitutes a franchise;
  • strategies for drafting licenses and distribution agreements to avoid accidental franchises; and
  • complying with federal and state franchise and business opportunity laws once a franchise is established.

They discussed examples of well known businesses which were deemed to be accidental franchises by courts, and the legal consequences of those legal decisions. Much of the questions and answers from the audience were about structuring to avoid the franchise trap.

Of special interest was the hot topic of agreements in the cannabis space. Rochelle and Craig discussed:

  • the risks of accidental franchising in the cannabis distribution business;
  • retail cannabis/cbd licensing programs (e.g. ONE Cannabis, Miracle Leaf) which operate under a common brand and business concept as service businesses;
  • how some state registration states like California will not permit the offer and sale of cannabis franchises because of federal illegality;
  • other complications including state franchise registration, federal legalization, banking, insurance, federal income tax deductions and financial statement presentation.

As new industry sectors like cannabis move into licensing multiple locations, the reward of franchising–leveraging local knowledge and capital–is obvious. But, sometimes, the danger of the accidental franchise is overlooked inadvertently. Both Rochelle and Craig encourage all businesses expanding with a license model to consider whether they are creating an accidental franchise system.