1. Chapter 40 Franchises and Special Forms of Business

2. Franchise Key Term Description Franchise
An arrangement that is 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
Franchisor (licensor)
The party who grants the franchise and license to a franchisee in a franchise arrangement
Franchisee (licensee)
The party who is granted the franchise and license by a franchisor in a franchise arrangement
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Exhibit Franchise
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Types of Franchises
Distributorship franchise: A franchisor manufactures a product and licenses a franchisee to distribute the product to the public
Processing plant franchise: A franchisor provides
Secret formula or process to the franchisee
The franchisee manufactures the product and distributes it to retail dealers
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Types of Franchises
Chain-style franchise: A franchisor licenses a franchisee to
Make and sell its products
Distribute its services to the public from a retail outlet serving an exclusive territory
Area franchise: A franchisor authorizes a franchisee to negotiate and sell franchises on its behalf in designated areas
The area franchisee is called a subfranchisor
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6. Exhibit 40.2 - Area Franchise
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FTC Franchise Rule
Federal Trade Commission (FTC): A federal government agency that is empowered to enforce federal franchising rules
FTC franchise rule: A rule set out by the FTC
Requires franchisors to make full presale disclosures to prospective franchisees
Registration of the disclosure document with the FTC prior to its use is not required
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8. Disclosure of Sales or Earnings Projections Based on Actual Data
For projections based on the actual sales, income, or profit figures of an existing franchise, the franchisor must disclose the following
The number and percentage of its actual franchises that have obtained such results
A cautionary statement in at least 12-point boldface type
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9. Disclosure of Sales or Earnings Projections Based on Hypothetical Data
The franchisor must disclose the following
Assumptions underlying the estimates
Number and percentage of actual franchises that have obtained projected results
A cautionary statement in at least 12-point boldface print
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FTC Franchise Notice
A statement required by the FTC to appear in at least 12-point boldface type on the cover of a franchisor’s required disclosure statement to prospective franchisees
State disclosure laws
Uniform Franchise Offering Circular (UFOC): A uniform disclosure document that requires a franchisor to make specific presale disclosures to prospective franchisees
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Franchise Agreement
An agreement that a franchisor and franchisee enter into
It sets forth the terms and conditions of a franchise
Trademark or service mark: A distinctive mark, symbol, name, word, motto, or device that identifies the goods or services of a particular franchisor
Trade secrets: Ideas that make a franchise successful but that do not qualify for trademark, patent, or copyright protection
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12. Topics Included in a Franchise Agreement
Licensing of
intellectual property
Initial license fee
Royalty fees
Assessment fee
Lease fees
Cost of supplies
Consulting fees
and other expenses
Territory
Quality-control standards
Training requirements
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13. Topics Included in a Franchise Agreement
Covenant not to compete
Arbitration clause
Duration
Other terms and conditions
Total investment
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14. Liability of Franchisor and Franchisee
For a properly organized and operated franchise, the franchisor and franchisee are separate legal entities
Franchisor deals with the franchisee as an independent contractor
Franchisors are liable for their own contracts and torts
Neither party is liable for the contracts or torts of the other
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15. Case 40.1: Franchise Liability
Rainey v. Domino’s Pizza, LLC
998 A.2d 342, Web 2010 Me. Lexis 56 (2010)
Supreme Judicial Court of Maine
Issue
Under the facts of this case, can Domino’s be held vicariously liable for the alleged negligence of its franchisee TDBO?
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16. Case 40.2: Franchisor Liability
Martin v. McDonald’s Corporation
572 N.E.2d 1073, Web 1991 Ill.App. Lexis 715
Court of Appeals of Illinois
Issue
Is McDonald’s liable for negligence?
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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
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18. Termination of a Franchise
Franchise agreements permit a franchisor to terminate the franchise for cause
Unreasonably strict application of a just cause termination clause constitutes wrongful termination
Termination-at-will clauses – void on the grounds that they are unconscionable
Franchisee can recover damages caused by the unlawful termination and recover the franchise
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19. Breach of the Franchise Agreement
Franchise agreement is an enforceable contract
Breach of contract
Aggrieved party can sue the breaching party for rescission of the agreement, restitution, and damages
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Licensing
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
Licensor: The party who grants a license
Licensee: The party to whom a license is granted
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Exhibit 40.3: License
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Joint Venture
An arrangement in which two or more business entities combine their resources to pursue a single project or transaction
Joint venture partnership: A partnership owned by two or more joint venturers that is formed to operate a joint venture
Joint venture corporation: A corporation owned by two or more joint venturers that is created to operate a joint venture
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23. Exhibit 40.4 - Joint Venture Partnership
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24. Exhibit 40.5 - Joint Venture Corporation
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Strategic Alliance
An arrangement between two or more companies whereby they agree to ally themselves and work together to accomplish a designated objective
Allows the companies to reduce risks, share costs, combine technologies, and extend their markets
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