The Illusion of Simplicity

Occasionally, licensing, distribution, or consulting agreements are formed without awareness of franchise law implications, and these may have risky consequences. In Michigan, where there is limited registration and franchise-specific oversight body, business owners may assume they are free to design informal or creative structures without regulatory scrutiny. But the law is less concerned with what the parties intend, and more concerned with what they’ve actually created.

A telling example involves a company that establishes a network of distributed LLCs—each with a different individual minority owner acting as manager—operating under the same brand name provided by the majority owning company itself. Revenue generated by each LLC is directed entirely through the majority owner’s central business, a fee is paid to itself before being passed back through to its distributed LLC and minority member. While there are oftentimes no formal license or franchise agreements, the elements of brand or mark use, centralized control, and payment are present.

The result is an example of what regulators and courts may classify as a hidden franchise—a franchise in substance, even if not in name. Or, as the saying goes: If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.

This article explores how hidden franchises arise from such arrangements, with particular attention to Michigan’s legal landscape. Though the state relies on the Federal Trade Commission’s Franchise Rule, it enforces anti-fraud principles through the Michigan Franchise Investment Law. When viewed through this dual lens—federal definition and state enforcement—a seemingly ordinary business structure can trigger a cascade of obligations and liabilities.

The Legal Architecture Behind the Franchise Label

A. The Federal Rule: Form vs. Function

Under the Federal Trade Commission’s Franchise Rule, a franchise is not what the parties call it—it is what the relationship functionally resembles. The test is straightforward on its face but expansive in practice. If a business relationship involves: (1) the right to operate under a trademark or commercial name, (2) significant control or assistance by one party over the business methods of another, and (3) a required payment by the operator to the brand-holder, it is a franchise. Whether that relationship is documented in a single contract or arises from a web of formal or informal agreements is immaterial.

In the distributed LLC scenario described earlier, each sub-entity receives a trade name from the majority owner, operates under that name, and routes all business revenue through the parent entity. The financial funneling and managerial structure imposed by the majority owner, as well as operational oversight, exceeds the definition of significant control. And while no fee is labeled as such, the very act of surrendering all proceeds to a central owner before redistribution meets the elements of fee or payment typically found in franchise arrangements. The entire arrangement (oftentimes designed with the purpose of evading franchising disclosures), in substance, meets the FTC’s definition of a franchise.

B. Common Pitfalls in Hidden Franchise Structures

There are several ways that business owners inadvertently create franchises:

• Trademark Uniformity: Allowing multiple entities to use a shared brand—even without a written license—triggers the first element.

• Centralized Processes: Standardizing operations or requiring approval for decisions can constitute “significant control” or assistance. Operating agreements and services agreements may trigger this element.

• Revenue Streams: Centralizing income or requiring fees for support services can be interpreted as a required payment, even without labeling it as a franchise fee. Billing services and bifurcated ownership interests may trigger this element.

What makes the distributed LLC structure especially vulnerable is the combination of all three elements in an informal wrapper. The lack of written licensing, the implicit approval of majority owners, and the centralized financial flow may have been intended to streamline operations—but they collectively form a disguised or hidden franchise.

C. Safe Harbors and Strategic Structuring

There are, to be sure, legal exemptions that may apply. The FTC Franchise Rule includes carve-outs for fractional franchises, large investors, and certain intra-corporate arrangements. However, these are narrow, technical defenses that require careful compliance. For example, the fractional franchise exemption is only available when the franchisee has substantial prior experience in the relevant business and sales from the franchised product are expected to be a minor portion of the total volume. Most informal LLC setups as described above won’t qualify as the franchised product or service is a majority or entire total volume, as the billing is handled through the branded centralized majority owner’s business.

The safest course of action for any Michigan business attempting to build scalable operations under a unified name is not to avoid the term “franchise,” but to simply analyze the structure early and disclose accordingly. This is especially important when control, coordination, and payment flows are present. Where there’s a duck, the law will hear a quack.

Conclusion

Returning to our example of the distributed LLCs, the structure was likely intended to maintain control under a unified brand in exchange for payment. And bypassing formal franchise documentation while retaining central control, under a unified brand, and routing revenue through a parent entity for payment, these companies step squarely into the terrain of franchise regulation.

In Michigan and beyond, business owners must recognize that a franchise is defined by conduct, not contract labels. Where the essential elements—brand use, payment, and operational control—are present, so too are the obligations of disclosure, registration (where applicable), and potential liability. Ignoring these realities can result in legal exposure ranging from rescission, losing all the brand protections otherwise available for franchisors, and private suits under the Michigan Franchise Investment Law to federal enforcement by the FTC. Ultimately, avoiding the term “franchise” does not avoid the law. Proper structuring and legal review are the only sure means to avoid the costly consequences of a franchise in disguise.

Zamzow Fabian PLLC is a law firm, this is meant as general information, contact us directly before relying on the broad statements made herein. That is, the information contained herein must not be construed as legal advice. Every business and situation is different. To receive legal advice that may be relied upon, you must consult directly with your legal counsel.

Section 14. Penalty: “Consistent with MCL 10.33 and MCL 30.405(3), a willful violation of this order is a misdemeanor.”

Section 1. Interpretation. This order must be construed broadly to prohibit in-person work that is not necessary to sustain or protect life.

Section 2. Order. [A]ll individuals currently living within the State of Michigan are ordered to stay at home or at their place of residence. [A]ll public and private gatherings of any number of people occurring among persons not part of a single household are prohibited.

However, abridged from section 2 includes exemptions.

Individuals may leave their homes if necessary to: (section 7(a))
(1) undertake outdoor recreational activities;
(2) critical infrastructure activities (healthcare, public health, necessary government functions, work on behalf of needy persons, work on behalf of disabled persons, and work on behalf of persons who are suffering from COVID-19, and persons who are designated as critical infrastructure by their employers (may be oral until March 31, 2020 at 11:59 pm);
(3) maintain minimum basic operations (as designated by employer) i.e. maintain the value of inventory and equipment, care for animals, ensure security, process transactions like payroll and benefits, and facilitate other works to work remotely;
(4) those government operations (as also listed in #2 above, section 6 of EO);
(5) to perform necessary health and safety functions;
(6) obtain supplies (use delivery to the maximum extent possible);
(7) care for a family member or a family member’s pet (even in another household);
(8) care for minors, dependents, elderly persons, and persons with disabilities;
(9) to visit persons in health care facilities;
(10) to attend court proceedings of essential or emergency purposes (court ordered);
(11) to work or volunteer as described in #2 above.
(12) travel between your own homes and residences, and as required by court order or law enforcement.

Full Text of EO 2020-21: https://www.michigan.gov/whitmer/0,9309,7-387-90499_90705-522626–,00.html

Michigan’s Govenor Gretchen Whitmer ordered the closure of all physical business locations, unless exempt. However, many of the exemptions do not apply if they otherwise would (i.e. the order does apply) if the work can be reasonably done remotely. Speak with an attorney before keeping your business open to avoid (a) a criminal penalty, (b) causing unnecessary exposure through close person-to-person contact, and (c) public backlash for noncompliance.

What happens if I violate the order? A 90-day misdemeanor, see MCR 10.33 and MCR 30.405. While there is some ambiguity in the order, it is in the interest of you and your neighbors to obey the spirit of the order.

What does the order say? In essence, Executive Order 2020-21, says do what we can to suppress the spread of COVID-19. It orders individuals to shelter in their place of residence beginning March 24, 2020 at 12:01 am, continuing through April 13, 2020 at 11:59 pm unless exempt.

Relevant to a law firm, court proceedings are permissible, however other lawyer activities are not.

Permissible activities. You may leave your residence for medical care or another other essential service, or care for family members. You can obtain necessary supplies, food, medicine, cleaning products, fuel, etc. You can undertake outdoor activities, and you can work as a critical infrastructure worker. People must abide by physical distancing (more often called “social distancing”) of six feet or more. When maximally possible: “[i]ndividuals must secure such services or supplies via delivery…”

Critical infrastructure workers “are those workers described by the Director of the U.S. Cybersecurity and Infrastructure Security Agency in his guidance of March 19, 2020 on the COVID-19 response (available here).” This includes some workers in each of the following sectors: Health care and public health; Law enforcement, public safety, and first responders; Food and agriculture; Energy; Water and wastewater; Transportation and logistics; Public works; Communications and information technology, including news media; Other community-based government operations and essential functions; Critical manufacturing; Hazardous materials; Financial services; Chemical supply chains and safety; and Defense industrial base.

But it is the spirit of the order that is most important to protect others and yourself.

What about my employees? If you have specific questions about your particular employment situation, you may contact Zamzow Fabian PLLC for more information. Including naming certain individuals to act in certain essential functions.

In Michigan, antitrust law generally prohibits agreements or practices that restrain trade or competition. However, Michigan law also recognizes a limited exemption for restrictive covenants in employment agreements, such as non-competition agreements and non-solicitation agreements.

Under Michigan law, restrictive covenants are generally enforceable if they are reasonable in scope, duration, and geographic area, and if they are necessary to protect a legitimate business interest of the employer. Such interests may include protecting trade secrets, confidential information, customer relationships, or the investment of time and resources in training employees.

The Michigan antitrust exemption for restrictive covenants in employment agreements is rooted in the Michigan Antitrust Reform Act (MARA), which was enacted to modernize and clarify Michigan antitrust law. MARA includes a provision that exempts certain types of agreements from the general prohibition on restraints of trade, including agreements between an employer and employee relating to the employment relationship.

The Michigan Supreme Court has interpreted this exemption of restrictive covenants to allow for the enforcement where reasonable, as long as they are necessary to protect legitimate business interests, do not pose an undue burden on the employee’s ability to work, and do not harm competition in the marketplace.

However, it is important to note that the enforceability of restrictive covenants in employment agreements can vary based on the specific facts and circumstances of each case. Courts will consider factors such as the employee’s job duties, the length of the restriction, the scope of the geographic area, and the overall impact on competition in the relevant market.

Moreover, Michigan law also imposes specific requirements for the enforceability of non-competition agreements, such as requiring that they be in writing, signed by the employee, and provided to the employee at the time of hire or as a condition of continued employment.

In conclusion, Michigan antitrust law recognizes a limited exemption for restrictive covenants in employment agreements, such as non-competition and non-solicitation agreements, as long as they are reasonable in scope and necessary to protect legitimate business interests. However, employers should be aware of the specific requirements and limitations imposed by Michigan law, and should carefully evaluate whether such agreements are appropriate for their particular circumstances.

The Uniform Commercial Code (UCC) is a set of laws that governs commercial transactions in the United States. It was first published in 1952 and has since been adopted in some form by every state in the country. The UCC provides a standardized set of rules for buying and selling goods, financing transactions, and other commercial activities.

Here are some key aspects of the UCC that attorneys should be familiar with:

1. Article 2: Sales

Article 2 of the UCC governs the sale of goods, including contracts for the sale of goods, warranties, and remedies for breach of contract. It defines what constitutes a “good” and provides rules for determining when title to goods passes from the seller to the buyer.

2. Article 3: Negotiable Instruments

Article 3 of the UCC governs negotiable instruments, such as checks and promissory notes. It provides rules for the transfer of these instruments and establishes the rights and obligations of parties involved in these transactions.

3. Article 4: Bank Deposits and Collections

Article 4 of the UCC governs bank deposits and collections. It provides rules for the transfer of funds between banks, and establishes the rights and obligations of parties involved in these transactions.

4. Article 9: Secured Transactions

Article 9 of the UCC governs secured transactions, such as loans secured by personal property. It establishes the rules for creating and enforcing security interests in personal property, including the requirements for perfection and priority of these interests.

5. Electronic Transactions

The UCC has been amended in recent years to address electronic transactions. Many provisions of the UCC, including those relating to negotiable instruments and secured transactions, have been updated to reflect the use of electronic records and signatures.

In conclusion, the Uniform Commercial Code is an essential body of law for attorneys who work in the area of commercial transactions. It provides a standardized set of rules for buying and selling goods, financing transactions, and other commercial activities, and has been adopted by nearly every state in the United States.