Current through Vol. 24-16, September 15, 2024
Rule 101.
(1)
"Act" means Act No. 269 of the Public Acts of 1974, being S445.1501 et seq. of
the Michigan Compiled Laws. Terms defined in the act have the same meanings
when used in these rules. Terms defined and explained herein have the same
meanings when used in either the act or these rules.
(2) The words "fee or charge" as used in
section 3(1) of the act include, but are not limited to:
(a) Present payments, deferred payments, and
royalty payments required of the franchisee by the franchisor arising from
sales of goods or services offered by the franchisee or its agents or
affiliates, or payments as a condition to maintaining the franchise
relationship other than payment for goods at a bona fide wholesale
price.
(b) Payments for a lease or
sale of real property in excess of a fair rental or market value. Among the
criteria for evaluation of fair rental or market value shall be the location of
the property, the physical attributes of the property, and what other lessees
or purchasers have paid for similar property in comparable locations.
(c) Payments for services. These payments are
presumed to be in part for the right granted to the franchisee to engage in the
franchise business. Ideas, instruction, training, and other programs are
services and not goods, irrespective of whether offered, distributed, or
communicated by word of mouth, through instructions or lectures, in written or
printed form, by record or tape recording, or any combination
thereof.
(d) Payments for
ownership. These payments include transfer of a controlling interest in a
business entity which holds a franchise, except those transfers where the
franchise held is not the principal asset of the transferor and not part of a
plan of distribution of franchises.
(e) Minimum purchase or minimum inventory
requirements other than at a bona fide wholesale price for which there is a
well-established market in this state.
(3) "Initial and deferred franchise fee"
means the amount of the franchise fee charged at the time of entry into the
business, whether paid in full upon commencement or paid on a deferred basis.
For purposes of
R
445.801, it does not include royalties or other
franchise fees measured by the amount of goods or services sold during the
operation of the franchise.
(4)
"Prescribed in substantial part by the franchisor," as used in section 2(3)(a)
of the act, shall be interpreted in light of the following:
(a) A marketing plan may be determined to be
prescribed if the franchise or other written or oral agreement, the nature of
the franchise business, or other circumstances permit or require the franchisee
to follow an operating plan or standard operating procedure, or their
substantial equivalent, promulgated by or for the franchisor. An operating plan
or standard operating procedure includes required procedures, prohibitions
against certain business practices, or recommended or offered practices,
whether or not enforceable with economic sanctions.
(b) A marketing plan may be determined to be
prescribed without regard to whether the franchisee is an independent
contractor and not the agent of the franchisor, and notwithstanding provisions
of a franchise or other agreement purporting to grant the franchisee complete
freedom in operating his business.
(c) The presence of any of these factors,
among others, indicates that a marketing plan or system is prescribed in
substantial part by the franchisor:
(i)
Representations by, or requirements of, the franchisor that the franchisee
operate a business which can purchase a substantial portion of its goods solely
from sources designated or approved by the franchisor.
(ii) Representations by, or requirements of,
the franchisor that the franchisee follow an operating plan, standard
procedure, training manual, or its substantial equivalent promulgated by the
franchisor in the operation of the franchise, violations of which may, under
the terms of the agreement, permit the franchisor to terminate or refuse to
renew the agreement.
(iii)
Representations by, or requirements of, the franchisor that the franchisee is
limited as to type, quantity, or quality of any product or service the
franchisee may sell, or that limit the franchisee as to the persons or accounts
to which he may sell the franchisor's product or service.
(iv) Representations by, or requirements of,
the franchisor that the franchisor aid or assist the franchisee in training or
in obtaining locations or facilities for operation of the franchisee's
business, or in marketing the franchisor's product or service.
(5) A franchisee's
business is "substantially associated," as used in section 2(3)(b) of the act,
with the franchisor's trademark, service mark, trade name, logotype,
advertising, or other commercial symbol designating the franchisor or its
affiliate if the franchise or other agreement, the nature of the franchise
business, or other circumstances permit or require the franchisee to identify
its business to its customers primarily under that trademark, service mark,
trade name, logotype, advertising, or other commercial symbol, hereinafter
referred to collectively as the "franchisor's mark," or to otherwise use the
franchisor's mark in a manner likely to convey to the public that it is an
outlet of or represents directly or indirectly the franchisor. The following
factors, among others, indicate that the business of a franchisee is
substantially associated with the franchisor's mark:
(a) The identification of the franchisor's
mark is utilized either by the franchisor or the franchisee to enhance the
chances of the franchisee's success in respect to the franchisee's transactions
with persons dealing in, or purchasing, the franchisor's products or
services.
(b) An agreement or
procedure providing for the franchisee to directly or indirectly contribute a
portion of its operating revenue to the franchisor for advertising
expenses.
(6) "Bona fide
wholesale price," as used in section 3(1)(a) of the act, refers to a price
which constitutes a fair payment for goods purchased at a comparable level of
distribution, and no part of which constitutes a payment for the right to enter
into, or continue in, the franchise business. Goods sold at a bona fide
wholesale price may include, but are not limited to, goods sold to the
franchisee for resale, as well as fixtures, equipment, raw materials, supplies,
and other goods used by the franchisee in the conduct of the franchise
business. The price charged for a trademarked product does not exceed its bona
fide wholesale price merely because the price exceeds the wholesale price of
nontrademarked products of comparable quality and specifications. If the
trademarked product commands a premium price by virtue of the trademark it
carries, the premium does not necessarily constitute the payment of a franchise
fee. A payment made directly or indirectly by the franchisee to or for the
benefit of the franchisor in excess of the bona fide wholesale price
constitutes a franchise fee. Services, rental payments, and the lease of real
or personal property are not within the category of "goods," irrespective of
whether payment for the services or property constitutes a fair payment for
comparable services or property. In a determination as to whether the price of
goods arising from a marketing plan or system of a manufacturer, licensor, or a
franchisor is a bona fide wholesale price, relevant cost, marketing, pricing,
or payment information, among other factors, may be considered.
(7) The existence of a "well-established
market," as used in section 3(1)(a) of the act, is a question of fact
determined by the presence, among other factors, of the following:
(a) A number of presently existing wholesale
and retail outlets of the franchisor or competitors in a similar line of
business.
(b) The quantity and
price of like or similar products presently sold in an existing geographical
area in Michigan.
(c) The ability
of the purchaser to resell at the suggested retail price of the manufacturer or
wholesaler or at a reasonable markup over the purchaser's cost.
(d) The ability of the purchaser to return
any unsold portion of the product without penalty.
(8) The existence of the following factors,
among others, which shall be interpreted by considering the previous operating
history of the franchisor and its existing franchisees, indicates an offer the
terms of which would create an "unreasonable risk" of loss of investment or
failure of a franchisee's business as used in section 13(c) of the act to a
prospective franchisee:
(a) Offerings whereby
a franchisor or an affiliated person has received, or will receive, a
substantial portion of his income from the sale of franchises rather than from
the sale of goods, services, or continuing royalties relating to the operation
of the franchise, and it appears to the administrator that the success of the
franchisor's program is based on the sale of franchises rather than the sale of
goods and services by the franchisee.
(b) Offerings where the natural person as a
franchisor, or the officers, directors, partners, or affiliates of a
franchisor, have received or will receive unreasonable front-end compensation
from the payment of franchise fees in relation to the present and future
services to be provided or the value of the franchise right prior to the
establishment of the franchise.
(c)
Offerings which permit the franchisor to directly or indirectly convey, assign,
or otherwise transfer its responsibility to fulfill contractual obligations to
franchisees unless the commitments to establish the franchise have been met or
provided for and adequate provision has been made for providing further
required contractual services, and the agreement shall so state.
(d) Offerings in which the franchisor is a
shell or an undercapitalized corporation.
(e) Offerings which provide excessive
compensation to a franchisor in relation to the services, goods, or value
provided and their likely profit to the franchisee.
(f) Offerings which involve excessive sales
commissions in relation to the likely profit to the franchisee.
(g) Offerings which provide that a franchisor
may unilaterally, during the term of the franchise agreement, require unlimited
or excessive increases in a royalty payment or require increases in price of
goods and services other than on a uniform basis to all persons similarly
situated.
(h) Offerings which
permit or provide the opportunity for an excessive or improper conflict of
interest between the franchisor and franchisee. Dual distribution systems shall
not per se be construed as a conflict of interest.
(i) Offerings which permit or provide that
the franchisor may receive from the franchisee, or arrange for third parties to
receive a note or series of notes, singularly or in combination, not exceeding
$15,000.00, without reserving to the franchisee a defense arising out of a
default by the franchisor.
(j)
Offerings which fail to provide that a franchisor shall, upon demand, furnish
the franchisee an accurate annual financial statement, unless the franchisor is
filing annual reports pursuant to the securities exchange act of 1934 or is
registered under the Michigan franchise investment law.
(9) "Material change," as used in section 19
of the act, includes, but is not limited to:
(a) The termination, closing, or failure to
renew, during a 3-month period, of the lesser of 10 or 10% of the franchises of
a franchisor, regardless of location, except that franchisors with an excess of
200 existing franchises shall file a report only upon the termination, closing,
or nonrenewal of 5% or more of its franchises, or the termination, closing, or
failure to renew, during a 3-month period, of the greater of 3 or 10% of the
franchises of a franchisor located in the state.
(b) A purchase of franchises by the
franchisor in excess of 5% of its existing franchises during 6 consecutive
months.
(c) A change in the
franchise fees charged by the franchisor.
(d) A significant adverse change in any of
the following:
(i) The obligations of the
franchisee to purchase items from the franchisor or its designated
sources.
(ii) The limitations or
restrictions on the goods or services which the franchisee may offer to its
customers.
(iii) The obligations to
be performed by the franchisor.
(iv) The franchise contract or agreement,
including amendments thereto.
(v)
The franchisor's accounting system resulting in a 5% or greater change in its
net profit or loss in any 6-month period.
(vi) The service, product, or model
line.
(10)
"Net worth," as used in section 6(2)(a) of the act, means the excess of assets
over liabilities, which is derived by the use of generally accepted accounting
principles consistently applied and documented in the form of a balance sheet,
with the exception that:
(a) Intangible assets
shall include only the liquidation value of the intangibles.
(b) Receivables of a franchisor due from its
franchisees shall be stated with an appropriate asset offset or reserve for
losses.
(c) Lump sum franchise fee
receipts, or a portion thereof, shall be offset by a "liability" for accrued
obligations to be performed in the future in consideration for receipt of the
fees.
(11) "Officer"
means the president, vice president, secretary, or treasurer of a corporation,
or a person occupying a similar status or performing similar
functions.
(12) "Specified number
of days" means calendar days, including Saturdays, Sundays, and holidays,
unless the act or rule specifically indicates that business days are
intended.
(13) Wherever the context
of these rules requires, in order to conform to the intent of the act, the term
"franchisor," as used herein, shall include subfranchisor.
(14) "Administrator," as used in these rules,
means the director of the department of commerce or the director of the
corporation and securities bureau.
(15) For the purposes of regulations, agents
shall be divided into 2 categories:
(a)
Franchise agents who represent only 1 franchisor and who are regulated pursuant
to part 6 of these rules.
(b)
Franchise agents who represent more than 1 franchisor or who employ persons to
assist in the sale of a franchise and who are regulated pursuant to part 7 of
these rules.
(c) A franchise agent
does not include the following:
(i) A person
effecting transactions in a franchise exempted by sections 6(2)(c), (d), (e),
(f), (g), (h), (j), or (k) of the act.
(ii) A partner, officer, or director of a
franchisor whose personal history is described in the prospectus and who
represents the franchisor in effecting the offer or sale of a
franchise.
(iii) Other persons
excluded by order in the discretion of the administrator from all or part of
the requirements of part 6 or 7 of these rules if:
(A) The contact of such person with
prospective franchisees is minimal and does not involve a solicitation to
purchase a franchise, or
(B) The
person is registered under the Michigan uniform securities act, acting with
written approval of his registered broker-dealer.
(d) A franchise agent may only be
a natural person.
