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Chapter 5 The Law of Business Organizations

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1 Chapter 5 The Law of Business Organizations
Sole proprietorship Partnerships Corporation Franchise

2 What is an Entrepreneur?
A person who forms and operates a new business either by himself or herself or with others.

3 What is an Business Organization?
The legal structure under which the business is conducted is often referred to as a business organization.

4 Forms of Conducting Business
Sole proprietorship Partnership Corporation Franchise Joint venture.

5 Franchises Established when one party licenses another party to use the franchisor’s trade name, trademarks, commercial symbols, patents, copyrights, and other property in the distribution and selling of goods and services.

6 Franchisor The party who does the licensing in a franchise arrangement. Also called the _______.

7 Franchisee The party who is licensed by the ______ in a franchise arrangement. Also called the _______.

8 Types of Franchises (1) Distributorship franchise:
The franchisor manufactures a product and licenses a retail franchisee to distribute the product to the public.

9 Types of Franchises (2) Processing plant franchise:
The franchisor provides a secret formula or process to the franchisee, and the franchisee manufactures the product and distributes it to retail dealers.

10 Types of Franchises (3) Chain-style franchise:
The franchisor licenses the franchisee to make and sell its products or distribute its services to the public from a retail outlet serving an exclusive territory.

11 Types of Franchises (4) Area franchise:
The franchisor authorizes the franchisee to negotiate and sell franchises on behalf of the franchisor in designated areas. The area franchisee is called a subfranchisor.

12 The Franchise Agreement
An agreement that the franchisor and franchisee enter into that sets forth the terms and conditions of the franchise (e. g., quality control standards, covenants-not–to –compete, etc).

13 Franchise Fees Initial license fee Royalty fee Assessment fee
Lease fees Cost of supplies

14 Trademarks Trademarks and service marks. A distinctive mark, symbol, name, word, motto, or device that identifies the goods or services of a particular franchisor. Licensing of marks. A franchisor licenses the use of its trademarks and service marks to its franchisees in the franchise agreement. Trademark infringement. Anyone who uses a mark without authorization from the franchisor may be sued for trademark infringement. The franchisor can recover damages and obtain an injunction prohibiting further unauthorized use of the mark.

15 Misappropriation of Trade Secrets
1. Trade secrets. Ideas, formulas, and methods of doing business that make a franchise successful but do not qualify for trademark, patent, or copyright protection. 2. Misappropriation of trade secrets. Anyone who steals and uses a franchisor’s trade secret is liable for misappropriation of a trade secret. The franchisor can recover damages and obtain an injunction prohibiting further unauthorized use of the trade secret.

16 Contract and Tort Liability (1)
Franchisors and franchisees are liable for their own contracts and torts. The same is true of tort liability

17 McDonald’s Corporation
CASE 6-1 Martin v. McDonald’s Corporation

18 CASE BRIFING 1. McDonald’s is a franchisor that licenses franchisees to operate fast-food restaurants and to use McDonald’s trademarks and service marks. One such franchise, which was located in Oak Forest, Illinois, was owned and operated by McDonald’s Restaurants of Illinois, the franchisee. …McDonald’s established an entire corporate division to deal with security problems at franchises. McDonald’s prepared a manual for restaurant security operations and required its franchises to adhere to these procedures.

19 CASE BRIFING 2. Jim Carson … regional security manager for the area in which the Oak Forest franchise was located. …visited the Oak forest franchise on 31 Oct, 1979 to inform… of security procedures… specifically mentioned these rules: 1) no one should throw garbage out the backdoor after dark. And 2) trash and grease were to be taken out the side glass door at least one hour prior to closing. During his inspection, Jim noted that the locks had to be changed at the restaurant and an alarm system needed to be installed for the back door. Jim never followed up to determine whether these security measures had been taken.

20 CASE BRIFING 3. On the evening of Nov 29, 1979, 6 women, all teenagers, was working to clean up and close the Oak Forest restaurant, Martin, Dudek, and Kincaid … A person later identified as Logan appeared at the back of the restaurant with a gun, ordering the crew to open the safe and get him the money … Logan shot and killed Martin, assaulted Dudek and Kincaid. Dudek and Kincaid suffered severe emotional distress from the assault.

21 CASE BRIFING 4. Evidence showed Logan had entered the restaurant through the backdoor. Trial testimony proved that the work crew used the backdoor exclusively, both before and after dark, and emptied garbage and grease through the backdoor all day and all night. there was evidence that the latch on the backdoor did not work properly. …that the crew had not been instructed about the use of the backdoor after dark and had never received copies of McDonald’s security manual, and that the required warning about not using the backdoor after dark had not been posted at the restaurant.

22 Is McDonald’s liable for negligence?

23 COURT'S REASONING McDonald’s had voluntarily assumed a duty to the crew at the Oak Forest franchise by establishing and requiring the franchisee to implement certain security measures and by obligating itself to inspect the restaurant to see that the required security measures were implemented. McDonald’s was liable for its own negligence due to the failure of security measures and the failure of its employee, Jim Carson, to follow up to determine that the security deficiencies at the Oak Forest franchise had been corrected. There was ample evidence for the jury to determine that McDonald’s had breached its assumed duty to the plaintiffs.

24 Decision The appellate court held that McDonald’s was negligent for not following up and making sure that the security deficiencies it had found at the Oak Forest franchise had been corrected. Affirmed.

25 Contemporary Business
What is the benefit to a franchisor to establish and require its franchisees to adhere to security rules? Is there any potential detriment? Explain.

26 Contract and Tort Liability (2)
Independent contractor: A separately organized and operated business that is not the agent of another party with whom it does business. This is the typical franchisor-franchisee arrangement. There is no agency relationship, so neither party is liable for the other’s contracts or torts.

27 CASE 6-2 Cislaw v. Southland Corp.

28 CASE BRIFING 1. Southland owns the“7-Eleven” trademark and licenses franchisees to operate convenience stores using this trademark. Each franchise is independently owned and operated. The franchise agreement stipulates that the franchisee is an independent contractor who is authorized to make all inventory, employment and operational decisions for the franchise.

29 2. Cislaw, 17 years old, died of respiratory呼吸 failure on May 10, 1984
2. Cislaw, 17 years old, died of respiratory呼吸 failure on May 10, His parents filed a wrongful death action against the franchise and Southland, alleging that Timothy’s death resulted from his consumption of clove丁香 cigarettes sold at a Costa Mesa, Californian, 7-Eleven franchise store. The Costa Mesa 7-Eleven was franchised to Charles Trujillo and Patricia Colwell-Trujillo.

30 CASE BRIFING 3. After answering the complaint, Southland moved for summary judgment, arguing that it was not liable for the alleged tortious conduct of its franchisee because the franchisee was an independent contractor. The plaintiffs alleged that the franchisee was Southland’s agent, and therefore Southland was liable for its agent’s alleged negligence of selling the clove cigarettes to their son. The trial court granted Southland’s motion. The Cislaws appealed.

31 Was the Costa Mesa franchisee an agent of Southland?

32 COURT'S REASONING The franchisor-franchisee arrangement does not create a principal-agent relationship unless the franchisor has the right to exercise substantial control over the operations of the franchisee. The franchise agreement gave Southland the right to establish the hours of operation of its franchises, to protect its “7-Eleven” trademark from misuse by the franchisee, and to set cleanliness and quality control standards at its franchises,

33 COURT'S REASONING but the agreement did not give Southland the right to control the day-to-day operations of its Costa Mesea franchise. The court found that because the franchisee made all inventory, employment, and day-to-day operational decisions, it was an independent contractor.

34 Decision The court of appeals held that the Costa Mesa 7-Eleven franchise was not an agent of Southland, but was an independent contractor. Affirmed.

35 Contemporary Business
Should franchisors be automatically held liable for the tortious conduct of their franchisees? Why or why not ? How careful must a franchisor be to retain enough control to protect the quality of the goods and services sold by its franchisees, but not to retain too much control so as to become liable for the actions of its franchisees?

36 Contract and Tort Liability (3)
Actual agency: An arrangement that occurs where a franchisor expressly or implicitly by its conduct makes a franchisee its agent. The franchisor is liable for the contracts entered into and torts committed by the franchisee while acting within the scope of the agency.

37 Contract and Tort Liability (4)
Apparent agency: Agency that arises when a franchisor creates the appearance that a franchisee is its agent when in fact an actual agency does not exist. The franchisor is liable for the contracts entered into and torts committed by the franchisee acting as an apparent agent.

38 Holiday Inns, Inc. v. Schelburne
CASE 6-3 Holiday Inns, Inc. v. Schelburne

39 CASE BRIFING 1.Holiday inns licensed Hospitality Venture to operate a franchised hotel in Fort Pierce, Florida. The Rodeo Bar, which had a reputation as the “hottest bar in town”, was located in the hotel. The Fort Pierce Holiday Inn and Rodeo Bar did not have sufficient parking, so security guards posted in the Holiday Inn parking lot required Rodeo Bar patrons to park in vacant lots that surrounded the hotel but that were not owned by the hotel. The main duty of the guards was to keep the parking lot open for hotel guests.

40 2. Two unarmed security guards were on duty on the night in question
2. Two unarmed security guards were on duty on the night in question. One guard was drinking on the job, and the other was an untrained temporary fill-in. The record disclosed that although the Rodeo Bar had a capacity of 240 people, the bar regularly admitted 270 to 300 people with 50 to 75 people waiting outside. Fights occurred all the time in the bar and the parking lots, and often there were three or four fights a night. Police reports involving 58 offenses, including several weapons charges and battery and assault charges, had been filed during the previous 18 months.

41 3.On the night in question, the two groups involved in the altercation/quarreling did not leave the Rodeo Bar until closing time. According to the record, these individuals exchanged remarks as they moved toward their respective vehicles in the vacant parking lots adjacent to the Holiday Inn. Ultimately, a fight erupted. The evidence shows that during the course of physical combat, Mr. Carter shot David Rice, Scott Turner, and Robert Shelburne. Rice died from his injuries.

42 4. Rice’s heirs, Turner, and Shelburne sued the franchisee, Hospitality Venture and the franchisor, Holiday Inns, for damages. The trial court found Hospitality Venture negligent for not providing sufficient security to prevent the foreseeable incident that took the life of Rice, and injured Turner and Shelburne. …Hospitality Venture was the apparent agent of Holiday Inns, and therefore Holiday Inns was vicariously liable for its franchisee’s tortious conduct. Turner was awarded $3,825,000 for his injuries, Shelburne received $1 million, and Rice’s interests were awarded $1 million. Hospitality Venture and Holiday Inns appealed.

43 Are the franchisee and the franchisor liable?

44 COUTR'S REASONING A franchisee is always liable for its own tortious conduct. A franchisor may be held liable for the tortious conduct of a franchisee if the franchisee is the “apparent agent” of the franchisor. This “apparent agent’ occurs when the franchisor misleads the public into believing that the franchise is really owned and operated by the franchisor, even though it is not.

45 Here, the court held that Holiday Inn led the public into believing that its franchisees were part of Holiday Inn’s system and not independently owned businesses. The court held that Holiday Inn’s reservation system, as well as the signs at the Fort Pierce franchise hotel, gave this appearance to the public. Therefore, Holiday Inns is vicariously liable for the tortious conduct of its franchisee.

46 Court's Decision The court of appeals held that franchisee was negligent, and that the franchisee was the apparent agent of the franchisor. Affirmed.

47 Contemporary Business
What does the doctrine of apparent agency provide? How does it differ from actual agency?

48 Termination of Franchises (1)
Termination “for cause,” Most franchise agreements, and state and federal laws, permit a franchisor to terminate the franchise “for cause” (e.g., nonpayment of franchise fees by the franchisee, continued failure of the franchisee to meet quality control standards).

49 Wrongful Termination Termination at will:
Most laws regulating franchising prohibit franchisors from terminating franchises at will. This is to prevent a franchisor from taking advantage of the good will developed at the franchise location by the franchisee.

50 Wrongful Termination If a franchisor terminates a franchise agreement without just cause, the franchisee can sue the franchisor for wrongful termination. The franchisee can recover damages caused by the wrongful termination and recover the franchise.

51 Conducting International Business
Joint Venture Branch office Subsidiary

52 Joint Venture A voluntary association of two or more parties (natural persons, partnerships, corporations, or other legal entities) to conduct a single or isolated project with a limited duration.

53 Branch Office A branch is a larger unit of the parent company that involves not only the placement of individuals in a particular locale but also the establishment of a facility, such as an assembly plant, mining operation, or service office.

54 Subsidiary A subsidiary is an independently organized and incorporated company.

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