Copyright: yupiramos / 123RF Stock Photo
Copyright: yupiramos / 123RF Stock Photo

The United States District Court for the Southern District of Illinois recently ruled that the Illinois Franchise Disclosure Act (IFDA) did not apply to a contract between a company, Accounting Practices Sales, Inc. (APS), and a broker where the broker was only required to pay APS a percentage of each commission received.

To constitute a “franchise” under the IFDA the person granted the right to engage in the business must pay the franchisor a direct or indirect fee of $500 or more.   The District Court ruled that the broker was not required to pay anything to APS outright and the commission payments could not be considered an indirect franchise fee because the amount was not guaranteed and could have conceivably amounted to nothing at all.

This is important guidance for businesses attempting to navigate state and federal franchise laws.   I counsel many clients who enter into business arrangements that would be considered a franchise but for the non-payment of a “guaranteed” fee.    The rule, at least in Illinois, appears to be that if the payment is indefinite, contingent on certain events, or not mandatory then a franchise does not exist and the IFDA will not apply.