Rules
Part of 9 licensing and franchise questions to ask before you sign anything
Franchises and licensing examples: Coty and Ramsay
Franchises and licensing examples: Coty's fragrance licenses and Gordon Ramsay's Caesars deal, tested against the FTC's three-part franchise test.
Celebrity ventures turn on the same questions as any other franchise or license. These franchises and licensing examples apply a three-part test drawn from the FTC's Franchise Rule to two celebrity arrangements: Coty's fragrance licenses and Gordon Ramsay's restaurant deal with Caesars Entertainment. Four non-celebrity arrangements provide comparison points, and each classification follows what the parties do rather than what the contract says on its cover.
The list runs from a celebrity fragrance license to a hotel management contract. Coty's brand licenses and a Gordon Ramsay restaurant deal come first, followed by a Domino's development agreement and an Orangetheory Fitness studio, the ordinary corporate structures that sit alongside the celebrity deals. Costco's Kirkland Signature coffee and a Marriott management contract close it out.
What to take away
- Classification turns on three things happening togethera mark, significant control or assistance, and a required payment.
- Calling an arrangement a license does not make it one, and neither does calling it a partnership.
- The consequence of getting it wrong falls on the system's side, not on the operator's.
- The payment element is where the surprises sit. McDonald's charges a $45,000 initial franchise fee and a 4% monthly royalty on sales, but a required purchase at a markup can satisfy the same element with no fee line at all.
The test, stated once
Three-Part Franchise Test
- Operator may operate under the system's mark
- System exerts significant control or assistance
- Operator pays or commits to pay the system
That definition sits in the Franchise Rule at 16 CFR 436.2, which defines a franchise, a franchise fee and a franchisee. The rule sets no minimum dollar amount for the payment element, and it carves out purchases of goods at bona fide wholesale prices for resale. The commission's Franchise Rule Compliance Guide explains how each element is read.
Where it applies, the system has to give a prospective operator a disclosure document before anything is signed or paid, at least 14 calendar days beforehand under the federal rule. The contents are listed in the rule, at 16 CFR 436.5: initial fees at Item 5, other fees at Item 6, the estimated initial investment at Item 7, litigation at Item 3, and outlet counts at Item 20.
Six real arrangements to classify
One. Coty's fragrance licenses. Burberry, Gucci and Calvin Klein grant a beauty company the right to use their name on fragrance ranges. Coty formulates, manufactures, prices and sells the scent. The brand owners approve packaging and campaigns, and Coty pays a royalty with a minimum guarantee; the celebrity names Coty also licenses, from Jennifer Lopez's Glow to Beyoncé's Heat, run on the same terms. The brand owners pay nothing.
Two. Gordon Ramsay and Caesars Entertainment. Caesars Entertainment runs the Gordon Ramsay restaurants at its Las Vegas resorts, among them Gordon Ramsay Pub & Grill and Hell's Kitchen at Caesars Palace. Ramsay licenses his name, approves the menus, and appears for openings; Caesars pays for the name and the appearances.
Three. A Domino's development deal. A Domino's Pizza operator commits to open several stores in one metro area over three years under a development schedule. The stores follow Domino's layout, menu and approved-supplier standards and run the company's point-of-sale system. Royalty runs about 5.5% of sales, with advertising contributions on top.
Four. An Orangetheory Fitness studio. A studio owner operates under the Orangetheory mark and class format. Studios are typically equipped with the brand's treadmills, rowers and heart rate monitors, bought from the franchisor or approved suppliers, and bookings run through the company's app.
Five. Kirkland Signature coffee. Costco sells Kirkland Signature coffee that Starbucks has roasted for it. The bag carries Costco's mark, Costco sets the price and holds the stock, and the roaster's brand is not on the shelf. The roaster is paid for the product.
Six. A Marriott management contract. A hotel owner appoints Marriott International to run the property. Marriott employs the staff and runs the daily business for a base fee, typically 2% to 4% of revenue, plus an incentive fee tied to profit. The owner keeps the profit and the risk.
Celebrity deals built on these shapes are not a separate category. Shaquille O'Neal holds a Papa John's franchise territory and co-founded Big Chicken, which franchises to other operators. Magic Johnson's company took Starbucks into urban markets through a joint venture and held Burger King restaurants. Margaritaville licenses Jimmy Buffett's brand to restaurants and resorts run by partners.
The answers, with the reason
| Case | Classification | Why |
|---|---|---|
| One: Coty's Burberry, Gucci and Calvin Klein licenses | Trademark license | Control runs from the licensee over the product; the brand owner approves rather than directs, and pays nothing |
| Two: Gordon Ramsay's restaurants at Caesars | Personal services plus a license | Ramsay supplies the name, menu approval and appearances; Caesars operates and pays |
| Three: A Domino's multi-unit development deal | Area development franchise | Mark, a required system and approved-supplier standards amounting to significant control, and payment: all three present |
| Four: An Orangetheory studio | Probably a franchise | Required equipment bought through the system, and required booking software, meet the payment and control elements |
| Five: Kirkland Signature coffee | Private label supply | The roaster's mark is not used on the shelf; Costco's is |
| Six: A Marriott management contract | Management agreement | No grant of Marriott's mark to the owner, and the money runs from owner to manager |
Case four is the one that catches people. A system can be a franchise without ever charging a franchise fee, if the payment arrives in the price of something the operator is required to buy. The franchises and licensing list page sets out the full range of arrangement types and how they differ.
Marriott uses both structures. It franchises the same brands to other owners, and hotel franchise agreements typically charge a royalty plus a marketing contribution of about 6% to 8% of rooms revenue.
Upfront franchise fees typically run from about $10,000 to $50,000. McDonald's charges $45,000 and takes 4% of monthly sales, plus rent where it owns the site. Chick-fil-A charges $10,000 and takes 15% of net profits plus half of the remaining pretax profit.
What the classification changes
- Whether a disclosure document must be given before signing, and how long before: at least 14 calendar days under the federal rule.
- What has to be disclosedthe system's litigation history, its fees, its outlet counts, and more.
- Which state registration or filing obligations attachabout a dozen states require a registration or notice filing before a franchise is offered, among them California, Illinois, Maryland, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin.
- What a court will do with a dispute about the relationship.
None of it changes the commercial merit of the arrangement. A well-run license and a well-run franchise are both fine businesses. The consequences of misclassification are legal and they land on the system.
How to work a case yourself
Ask the three questions in order and write the answer to each.
- Whose mark is on the door, and who granted the right to use it?
- Does the grantor control how the business operates, or materially assist it, beyond approving how the mark looks?
- Does the operator have to pay the grantor anything, including through required purchases?
Three yeses is a franchise, whatever the paperwork is titled.
The franchises and licensing page sets out the test at length, and the restaurant ventures examples page covers the venue formats these arrangements appear in. The celebrity companies examples page shows how coverage blurs the distinction with a change of verb.
Common questions
Why would a system want to avoid being a franchise?
Disclosure is work and the document is public to prospects. Some systems genuinely prefer a lighter relationship, and some are avoiding the obligation, which is where trouble starts.
Can an operator rely on the arrangement being called a license?
No. The classification follows the facts. An operator who thinks the three elements are present should take advice rather than accept the label.
Do these categories work outside the United States?
The three-part shape is broadly recognizable, and the specific obligations are national. Check the rules of the place the outlet will operate.
Is a required software subscription really a payment?
It can be. Required purchases from the system or a designated supplier, at a price above ordinary cost, are the classic route to satisfying the payment element without a fee.
What do franchise fees look like in practice?
McDonald's charges a $45,000 initial franchise fee and a 4% monthly royalty on sales. Subway charges $15,000 up front and 8% of gross sales, with an advertising contribution on top.
