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

© 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 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 Advantages to Franchising 1.The franchisor can reach lucrative new markets. 2.The franchisee has access to the franchisor’s knowledge and resources. 3.Franchisee runs an independent business. 4.Consumers are assured of uniform product quality.

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

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

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

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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. –Pizza Hut Corporation franchises independently owned restaurant franchises to make and sell pizzas to the public under the “Pizza Hut” name.

© 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 Example of an Area Franchise Area Franchise Franchisor Franchise Franchise Franchise Subfranchisor FranchiseeFranchisee Franchisee

© 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 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 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 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 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 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 Termination of Franchises Termination “For Cause” Termination At Will Wrongful Termination

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 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 Termination at Will Most state and federal laws regarding franchising prohibit franchisors from terminating the franchises at will. Prevents a franchisor from taking advantage of the good will developed at the franchise location by the franchisee.

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

© 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 issued for distribution of goods, services, software, and digital information.

© 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. –Joint venturer liable for the damages a breach causes.

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

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Joint Venture Corporation Two or more joint venturers 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 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.