Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 5 th Edition by Henry R. Cheeseman Chapter 30 Franchises, Licensing, and Strategic Alliances

30 - 2Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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).

30 - 3Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Franchise 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 Generally, the franchisor and the franchisee are established as separate corporations

30 - 4Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Advantages to Franchising 1.The franchisor can reach lucrative new markets 2.The franchisee has access to the franchisor’s knowledge and resources while running an independent business 3.Consumers are assured of uniform product quality

30 - 5Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Parties to a Typical Franchise Agreement Grant of franchise and license to use trademarks, service marks, and trade secrets Franchisor (Licensor) Franchisee (Licensee)

30 - 6Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Types of Franchises (1 of 4) Distributorship Franchise The franchisor manufactures a product and licenses a retail franchisee to distribute the product to the public e.g., the Ford Motor Company manufactures automobiles and franchises independently owned dealers to sell them to the public

30 - 7Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Types of Franchises (2 of 4) Processing Plant Franchise The franchisor provides a secret formula or process to the franchisee The franchisee manufactures the product and distributes it to retail dealers e.g., the Coca-Cola Corporation licenses regional bottling companies to manufacture and distribute soft drinks under the “Coca-Cola” and other brand names

30 - 8Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Types of Franchises (3 of 4) Chain-Style Franchise The franchisor licenses the franchisee to make and sell its products or distribute services to the public from a retail outlet serving an exclusive territory Most fast-food franchises use this form e.g., the Pizza Hut Corporation franchises independently owned restaurant franchises to make and sell pizzas to the public under the “Pizza Hut” name

30 - 9Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Types of Franchises (4 of 4) Area Franchise The franchisor grants the franchisee a franchise for an agreed-upon geographical area The franchise may determine where to locate the outlets in the designated area An area franchisee may be granted the authority to negotiate and sell franchises in the designated area on behalf of the franchisor subfranchisor Franchisee is also called the subfranchisor

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Example of an Area Franchise Area Franchise Franchisor FranchiseFranchiseFranchise Subfranchisor FranchiseeFranchiseeFranchisee

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. State Disclosure Laws Many states have enacted statutes that require franchisors to make specific presale disclosures to prospective franchisee Uniform Franchise Offering Circular (UFOC) Some states use a uniform disclosure statement called the Uniform Franchise Offering Circular (UFOC)

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Federal Trade Commission’s (FTC) Rule The FTC requires franchisors to make presale disclosures to prospective franchisees The franchisor must disclose assumptions underlying any estimates and hypothetical data The franchisor must provide a mandated precautionary statement

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Breach of the Franchise Agreement A lawful franchise agreement is an enforceable contract Each party owes a duty to adhere to and perform under the terms of the franchise agreement breached If the agreement is breached, the aggrieved party can sue the breaching party for rescission of the agreement, restitution, and damages

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Trademarks licenses trademarksservice marks A franchisor licenses the use of its trademarks and service marks to its franchisees 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Misappropriation of Trade Secrets trade secret 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Contract and Tort Liability contracts Franchisors and franchisees are liable for their own contracts tort liability Franchisors and franchisees are liable for their own tort liability e.g., if a person is injured by a franchisee’s negligence, the franchisee is liable

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Independent Contractor Status If properly organized and operated, the franchisor and franchisee are separate legal entities independent contractor 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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 its agency

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Termination “For Cause” “just cause” A franchisor can terminate a franchise agreement for “just cause” e.g., nonpayment of franchise fees by the franchisee e.g., continued failure to meet quality control standards

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Wrongful Termination 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Licensing licensor licensee An arrangement where a party that owns trademarks and other intellectual property (the licensor) contracts to permit another party (the licensee) to use these trademarks and intellectual property in the distribution of goods, services, software, and digital information

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Parties to a Typical Licensing Agreement Grant of permission to use trademarks, service marks, trade names, and other intellectual property Licensor Licensor Licensee Licensee

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Joint Venture An arrangement whereby two or more business entities combine their resources to pursue a single project or transaction Joint Venturer Joint Venturer – a party to a joint venture fiduciary dutyloyalty Joint venturers owe each other duty of fiduciary duty and loyalty If a joint venturer violates this duty, it is liable for the damages the breach causes

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Strategic Alliance (1 of 2) An arrangement between two or more companies in the same industry whereby they agree to ally themselves to accomplish a designated objective It allows the companies to reduce risks, share costs, combine technologies, and extend their markets

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Strategic Alliance (2 of 2) Strategic alliances do not have the same protection as mergers, joint ventures, or franchising, and are sometimes dismantled Consideration must always be given to the fact that a strategic alliance partner is also a potential competitor