Most everyone has some notion of what the term “franchise” means, thanks to their local fast-food store. In the classic franchise system, the franchisor dictates nearly every aspect of the franchisee’s business. The overarching model is one of pervasive control. Manufacturers and suppliers who rely on this common-sense understanding of franchises, however, can find themselves with a nasty surprise: State franchise laws often significantly restrict the amount of control one would normally expect, as a recent decision from Missouri illustrates.

After years of playing the field, Mast-Jägermeister UC, Inc. (Jägermeister) was ready to settle down — the international producer of intoxicating liquors had decided to bring its entire U.S. distribution system under one roof. Consolidating with a single distributor, however, meant cutting ties with several others, including Major Brands, Inc. (Major Brands), which had been selling and promoting Jägermeister products in Missouri under a decades-long oral agreement. Major Brands responded with a lawsuit alleging that Jägermeister had no right to terminate the agreement without good cause and that Jägermeister had wrongfully terminated under the Missouri Franchise Act. Jägermeister moved to dismiss, arguing that there was no franchise.

A franchise is typically defined by the existence of three elements: (1) a license to use another's trademark, (2) a marketing system, and (3) payment of a franchise fee. The Missouri Franchise Act contains typical trademark and marketing requirements but does not explicitly require the franchisee to pay a fee. Instead, the existence of a “community of interest” is sufficient to create a franchise. A community of interest exists where a distributor’s investments are “substantially franchise specific” and “required by the parties’ agreement or the nature of the business.”

In denying Jägermeister’s motion to dismiss, the court found that Major Brands had pled facts supporting a community of interest — and therefore a franchise — including “many franchise-specific investments.” The court noted these investments were made with “Jägermeister’s full knowledge and encouragement.” The court also relied on the shared use of Major Brands’ name and logo alongside Jägermeister’s and the corresponding appearance of a “close relationship” between the two. Although Jägermeister argued that it had never granted Major Brands a trademark license, the court found an implied license “based on the ongoing pattern and practice of the dealings.” Based on these conclusions, the court allowed the case to proceed to discovery, likely costing Jägermeister dearly in either settlement or legal expenses.

Key Takeaways:

• Beware of accidental franchise relationships. Not all state franchise laws require a fee, and not all definitions of “fee” are limited to a simple cash payment. Even if you don’t think of your channel relationships as franchises, it’s always worth checking state law.

• Oral agreements are trouble in litigation. The parties here still don’t know what the terms of their agreement are: In effect, the court concluded it needed discovery before it could determine them conclusively.

• Take control of your intellectual property. You might never intend to give your channel partner the indefinite right to use your trademark, but absent an explicit license, one can be implied through use with your knowledge.