1. Chapter 40 Franchises and Special Forms of Business
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

2. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Franchising is an important method of distributing goods and services to the public.
In the United States, franchising accounts for over 25 percent of retail sales and 15 percent of gross domestic product (GDP).
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

3. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Franchise
Established when franchisor licenses franchisee to use the franchisor’s trade name, trademarks, commercial symbols, patents, copyrights, and other property in the distribution and selling of goods and services.
Franchisor and the franchisee are usually established as separate corporations.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

4. Advantages to Franchising
The franchisor can reach lucrative new markets.
The franchisee has access to the franchisor’s knowledge and resources.
Franchisee runs an independent business.
Consumers are assured of uniform product quality.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

5. Parties to a Typical Franchise Agreement
Franchisor (Licensor)
Grant of franchise and license to use trademarks, service marks, and trade secrets
Franchisee (Licensee)
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

6. Distributorship Franchise
Franchisor manufactures a product and licenses a retail franchisee to distribute the product to the public.
Manufacture of automobiles and franchises independently owned dealers to sell them to the public.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

7. Processing Plant Franchise
Franchisor provides a secret formula or process to the franchisee.
Franchisee manufactures the product and distributes it to retail dealers.
Regional bottling companies to manufacture and distribute soft drinks under the “_ _ _ Cola” brand name.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

8. Chain-style Franchise
Franchisor licenses the franchisee to make and sell its products or distribute services to the public from a retail outlet serving an exclusive territory.
Franchises independently owned restaurant franchises to make and sell pizzas to the public under the “Pizza _ _ _ _” name.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

9. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Area Franchises
Franchisee may be granted the authority to negotiate and sell franchises in the designated area on behalf of the franchisor.
Franchisee is also called the subfranchisor.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

10. Example of an Area Franchise
Franchisor
Subfranchisor
Franchise
Franchise
Franchisee
Franchisee
Franchisee
Franchise
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

11. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
State Disclosure Laws
Many states have enacted statutes that require franchisors to make specific presale disclosures to prospective franchisee.
Most states use a uniform disclosure statement called the Uniform Franchise Offering Circular (UFOC).
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

12. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
FTC Franchise Rule
The FTC requires franchisors to make presale disclosures to prospective franchisees.
The franchisor must disclose assumptions underlying any estimates and hypothetical data.
If projections are based on actual data, franchisor must disclose specifics.
The franchisor must provide a mandated precautionary statement.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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Trademarks
A franchisor licenses the use of its trademarks and service marks in the franchise agreement.
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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

14. 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

15. The Franchise Agreement
An agreement that the franchisor and the franchisee enter into that sets forth the terms and conditions of the franchise.
Quality control standards
Training requirements
Covenant not to compete
Arbitration clause
Use of franchisor’s trade name, logo, and trademark
Conditions for the termination of the franchise
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

16. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Franchise Fees
Franchise fees payable by the franchise are usually stipulated in the franchise agreement.
Initial license fee
Royalty fee
Assessment fee
Lease fee
Cost of supplies
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

17. Termination “For Cause”
A franchisor can terminate a franchise agreement for “just cause.”
Nonpayment of franchise fees by the franchisee
Continued failure to meet quality control standards
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

19. Breach of the Franchise Agreement
Lawful franchise agreement is an enforceable contract.
Each party owes a duty to adhere to and perform under the terms of the franchise agreement.
Aggrieved party can sue the breaching party for rescission of the agreement, restitution, and damages.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

20. Independent Contractor Status
If properly organized and operated, the franchisor and franchisee are separate legal entities.
The franchisor deals with the franchisee as an independent contractor.
A franchisee is not the agent of the franchisor.
The franchisor is not liable for the franchisee’s contracts and torts.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

21. Contract and Tort Liability
Franchisors and franchisees are liable for their own contracts.
Franchisors and franchisees are liable for their own tort liability.
If a person is injured by a franchisee’s negligence, the franchisee is liable.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

22. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Licensing
A business arrangement that occurs when the owner of intellectual property (the licensor) contracts to permit another party (the licensee) to use the intellectual property.
Trademarks, service marks, trade names, copyrights
Licenses are issued for distribution of goods, services, software, and digital information.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

23. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Joint Venture
A joint venture is an arrangement where two or more business entities combine their resources to pursue a single project or transaction.
Joint venturers have equal rights to manage the joint venture
Joint ventures owe each other the fiduciary duties of loyalty and care.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

24. Joint Venture Partnership
Joint venture operated as a partnership.
Each joint venturer is considered a partner of the joint venture.
Each joint venturer is liable for the debts and obligations of the joint venture partnership.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

25. Joint Venture (continued)
Joint Venturer
Joint Venturer
Investment of capital
Investment of capital
Joint Venture Partnership
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

26. Joint Venture Corporation
Two or more joint venturers corporations create a third corporation to operate a joint venture.
The joint venturers are shareholders of the joint venture corporation.
The joint venture corporation is liable for its own debts and obligations.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

27. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Strategic Alliance
An arrangement between two or more companies in the same industry.
Companies agree to ally themselves to accomplish a designated objective.
Strategic alliances do not have the same protection as mergers, joint ventures, or franchising.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman