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

© 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

© 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 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

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

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

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

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

© 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 Franchisor Subfranchisor Franchise Franchise Franchisee Franchisee Franchisee Franchise © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

© 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

© 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

© 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

© 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 “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

© 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

© 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

© 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

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

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

© 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