How Contract Drafting Can Trigger Franchise Obligations: Key Risk Areas in Brazil and the United States
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IP licensing, distribution and collaboration agreements are widely used to scale business, reach new markets and build commercial ecosystems. While these models provide flexibility, they also carry a regulatory blind spot: Depending on how rights, support and payments are structured, they may be characterized by courts or regulators as franchises.
If that occurs, the impact goes well beyond terminology. In the United States, a license may be treated as a franchise when certain factual elements are present. In Brazil, a relationship that operates with the substance of a franchise can be recognized as such even if the formalities of the Franchise Law were never observed – exposing the parties to annulment, restitution of amounts paid and damages.
This Legal Update outlines the triggers in both jurisdictions and offers practical guidance to help companies capture brand and other IP value while avoiding unintended franchise obligations.
How Franchise Definitions Differ in Brazil and the United States
United States: Franchise Elements Under the FTC Rule and State Variations
Under the Federal Trade Commission’s (FTC) Franchise Rule, an arrangement is a franchise if three elements coexist:
- The operator runs a business identified with or associated with the brand owner’s brand.
- The brand owner exercises, or has the right to exercise, significant control over the method of operation, or provides significant assistance.
- The operator is required to pay at least US$500 within the first six months1 to the brand owner or an affiliate as a condition of operating the business.
The FTC interprets “payment” broadly, covering not only direct fees but “all consideration” required as a condition of obtaining or commencing operations, which can include indirect forms of compensation such as required purchases with markups, retained rebates, and payments to affiliates or designated third parties.2
Beyond the federal rule, many US states apply their own definitions. Some mirror the FTC’s three-part test with variations, while others replace “control/assistance” element with concepts like a prescribed marketing plan or a community of interest between the parties.
States using “two-prong tests” may classify a franchise based solely on the presence of a fee combined with either brand use or a marketing plan. These frameworks affect not only classification but also trigger obligations around registration, disclosure, and relationship governance (including rules on renewal, termination, and good faith).
In such states, once a fee and one qualifying element are present, the structure is likely to fall within franchise regulation, regardless of how the contract is labeled.
Brazil: A Combined Formal-and-Factual Regime
Brazil’s Franchise Law (Law No. 13.966/2019) defines a franchise as a system in which the franchisor authorizes the franchisee to use its trademarks and other IP, always in connection with the right to produce or distribute products or services on an exclusive or non-exclusive basis, and to adopt the franchisor’s business methods and operational systems, in exchange for direct or indirect remuneration and without creating consumer or employment ties.
The Brazil law places strong emphasis on precontractual transparency through the Franchise Offering Circular (COF), which must be provided in Portuguese, with detailed minimum content, at least 10 days before any signature or payment. Contracts producing effects in Brazil must be in Portuguese or accompanied by a sworn translation.
Crucially, the Brazilian courts treat franchise characterization as a combination of formal and factual elements:
- The presence of brand use, transfer of know-how, operational standardization and structured support under remuneration points to the substance of a franchise, regardless of the label (e.g., “license,” “distribution,” “agency”).
- The absence or defect of the COF and other formalities does not prevent the relationship from being treated as a franchise. It usually means that, once the franchise substance is found, the contract becomes vulnerable to annulment, restitution of amounts paid and damages.
Case law from the Superior Court of Justice (STJ) has emphasized that franchise agreements are generally contracts of adhesion, where the franchisee accepts terms drafted unilaterally by the franchisor. In Special Appeal No. 1,602,076/SP,3 the STJ specifically held that franchise agreements may take on the nature of adhesion contracts where the franchisor presents a standardized contractual instrument with non-negotiable clauses relating to brand use, territorial exclusivity, royalties and termination, thereby limiting the franchisee’s bargaining power and placing it on a take-it-or-leave-it basis, with no real margin for negotiation.
However, STJ also understood that although franchise agreements are often structured as adhesion contracts, they remain quintessentially business relationships, entered into between market participants acting for profit. From this perspective, while the legal system affords certain level of protection to adhesion contracts, in the franchise scenario the franchisor is not treated as a consumer. As a result, consumer law and other regimes designed for structurally asymmetric relationships do not apply, and the franchise statute governs, without granting franchisees the special procedural protections or the status of a vulnerable party claimed by appellants in cases such as the STJ appeal cited above.
State courts, including the São Paulo Court of Appeals (TJSP), have requalified contracts labeled as licenses as franchises agreements when the purported licensor exercises control over the business activity, transfers operational know-how, and imposes standard operating methods.4 In the TJSP decision issued in Appeal No. 0021687-37.2017.8.26.0196, for example, a so-called “trademark license" agreement was recharacterized as franchise because the licensor required compliance with store layouts, uniforms and designated suppliers, conducted audits and provided training and operational manuals, all of which were deemed indicative of a franchise relationship rather than a simple license.
As a result, operational manuals, mandatory training and intensive support are often treated as characteristic signs of franchising, even when the contract is formally presented as a license or distribution model. When such elements are present, flaws or omissions in the COF usually provide relevant legal basis for the annulment of the contract and for the granting of monetary compensation.
Drafting and Conduct: Aligning Form with Legal Substance
Key Guiding Principles
Across both jurisdictions, a few guiding principles emerge:
- Contracts that protect the brand, but avoid prescribing the partner’s business, are more likely to remain in license/distribution territory.
- Contracts that monetize methods and support and build a unified customer experience tend to fall within the franchise space and should be treated as such.
- Courts look at operational reality, not only at well-intentioned clauses. Emails, playbooks, guidance visits and real-world practices often carry more weight than contractual disclaimers.
Figure 1 – Practical safeguards to avoid franchise triggers
| Risk vector | Brazil – avoid “business-format” franchising | United States – deactivate the FTC triad and state variants |
|---|---|---|
| Brand & identity | Limit brand use to products/packaging and materials; avoid network-style store design or prescriptive ambience | Use brand controls narrowly; avoid layouts, scripts or location approval suggesting a branded network; use trademark license language that is limited to quality control, not operational control |
| Assistance | No operational manuals, no standardized mandatory training, support limited to episodic and technical matters, not to a full system | Avoid “significant assistance;” if training is offered, make it optional and product-focused; limit support to brand integrity and product specs |
| Payments | Royalties for brand use only where no transfer of methods and structured support; avoid systemic remuneration for “the system” | No required payments in the first six months, including indirect fees, as a condition of commencing business or exercising rights under the license; ensure genuine wholesale pricing, pass-through of rebates and refundable deposits |
| Supply | Preference for supplier freedom or objective, quality-based approved lists without hidden margins | Avoid exclusive purchasing obligations with mark-ups or retained rebates; where exclusivity is needed, document lack of economic benefit for the licensor; avoid tying arrangements that resemble franchise supply chains (e.g., bundled services, POS systems, mandated equipment with embedded recurring fees) |
| Governance | Avoid committees, marketing funds and governance structures typical of franchise networks when the intention is not to franchise | Avoid clauses that create intensive “community of interest” combined with required fees; pay particular attention to “fee + brand” states; include disclaimers that each party is an independent contractor and the licensor has no control over licensee’s business model, employees, pricing, operations, or profitability |
Note: In both countries, alignment between contractual language and day-to-day operation is essential. When practice contradicts the drafting, operational reality tends to prevail.
If the Line Has Already Been Crossed
Operating a franchise-like system without meeting franchise requirements can lead to significant exposure:
- In the United States, companies can face FTC investigations, civil penalties, injunctive relief and, more commonly, private actions under state franchise and unfair practices laws. Remediation often requires pausing new sales, correcting disclosures, revisiting pricing and supply structures and, in some cases, offering rescission and refunds.
- In Brazil, a relationship with franchise substance but defective COF or form may lead to annulment of the contract, restitution of all amounts paid and damages, and reputational impact. Courts have emphasized the protective function of precontractual disclosure and the typical adhesion nature of franchise agreements.
A practical response involves a pre-execution, targeted risk and compliance review of the documents and the transaction, ideally conducted before the parties formalize their relationship and finalize the documentation, together with an assessment of litigation exposure and a mitigation plan that may include formal regularization of the franchise program or, where legally viable, restructuring into a leaner license or distribution model.
Conclusion
Brand licensing and distribution structures can unintentionally fall within franchise regulation when contractual terms or day-to-day practices mirror the elements regulators and courts consider indicative of a franchise. Labels alone offer no protection. In the United States, companies must ensure that brand use does not coexist with significant assistance or required fees within the first six months, taking into account the added complexity of state-law variations. In Brazil, franchise characterization stems from a mix of formal and factual elements: the absence of a COF does not prevent a finding that the relationship is a franchise; it simply aggravates the consequences once franchise substance is identified.
If a model already sits near this boundary, a legal risk assessment of drafting and operational reality can help prevent unwanted reclassification and allow for early remediation.
Where the business model genuinely requires brand-driven standardization, know-how transfer, training and ongoing support, the safest and often most efficient route in both Brazil and the United States is to assume the franchise status and comply fully with the applicable frameworks, rather than attempt to fit a franchise-like operation into license or distribution labels.
1 16 C.F.R. § 436.1(h) (2026) (“Franchise means any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that: (1) the franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark; (2) the franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and (3) as a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.”).
2 16 C.F.R. § 436.1(s) (2026) (“Required payment means all consideration that the franchisee must pay to the franchisor or an affiliate, either by contract or by practical necessity, as a condition of obtaining or commencing operation of the franchise. A required payment does not include payments for the purchase of reasonable amounts of inventory at bona fide wholesale prices for resale or lease.”).
3 Special Appeal. Civil and Civil Procedure Law. Franchise agreement. Adhesion contract. Arbitration. The Brazilian Superior Court of Justice held that although franchise agreements are not subject to consumer protection rules, as they involve economic development rather than a consumer relationship, they still qualify as adhesion contracts and therefore must comply with the validity requirements set out in Article 4, paragraph 2, of the Brazilian Arbitration Act (Law No. 9,307/1996); where a “pathological” arbitration clause is prima facie identified, meaning one that is clearly unlawful, the Judiciary may declare its nullity regardless of the stage of the arbitral proceedings, and on that basis the arbitration clause was declared null and the special appeal was granted. Brazilian Superior Court of Justice (STJ), REsp No. 1,602,076/SP, Reporting Justice Nancy Andrighi, decided on September 15, 2016, published on September 30, 2016.
4 Appeal. Contract termination. Franchise agreement labeled as a trademark license agreement. The court denied legal aid to both the legal and natural persons after finding no financial hardship and allowed the payment of the additional court fees at the end of the proceedings, subject to enrollment as public debt if unpaid; on the merits, it partially upheld the appeal, holding that the agreement was in fact a franchise disguised as a trademark license for the sole purpose of avoiding the application of the Brazilian Franchise Law, set aside the statute of limitations, declared the contract null, and ordered the cancellation of all acts performed under it, including the mortgages, the issued credit instruments and the protests filed by the “licensor,” who nevertheless retained the right to claim payment for goods sold through ordinary legal proceedings, also determining that royalties actually paid by the plaintiff be reimbursed, while dismissing the claims for lost profits and for damages arising from the investments and lease entered into by the plaintiffs, and awarding moral damages in the amount of BRL 30,000 for the wrongful protests, with redistribution of costs and attorneys’ fees. São Paulo Court of Appeals (TJSP), Appeal No. 0021687-37.2017.8.26.0196, Reporting Judge Ricardo Negrão, 2nd Reserved Business Law Chamber, decided on March 29, 2022, published on March 31, 2022.
