Mich. Admin. Code R. 445.101

Current through Vol. 24-21, December 1, 2024

Section R. 445.101 - Definitions and explanations of terms

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.

Mich. Admin. Code R. 445.101

1979 AC