What advantages and disadvantages are associated with the sole proprietorship? What advantages and disadvantages are associated with the sole proprietorship? What is a franchise? What are the most common types of franchises? What is a franchise? What are the most common types of franchises? What laws govern a franchising relationship?  What laws govern a franchising relationship?  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2

What terms and conditions are typically included in a franchise contract? What terms and conditions are typically included in a franchise contract? What is wrongful termination? In what types of situations do courts typically find that a franchisor has wrongfully terminated a franchise? What is wrongful termination? In what types of situations do courts typically find that a franchisor has wrongfully terminated a franchise? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3

When choosing a business entity, entrepreneurs should consider: When choosing a business entity, entrepreneurs should consider: – Ease of creation. – Owners’ liability. – Tax considerations. – Need for Capital. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4

The owner is the business; anyone who does business without creating a separate business organization has a sole proprietorship. The owner is the business; anyone who does business without creating a separate business organization has a sole proprietorship. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5

Major disadvantage is that the owner is personally liable for all losses or liabilities incurred by the business enterprise. Major disadvantage is that the owner is personally liable for all losses or liabilities incurred by the business enterprise. Garden City Boxing Club, Inc. v. Dominguez – CASE 31.1 Garden City Boxing Club, Inc. v. Dominguez (2006). Why was Dominguez personally liable for the fee? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6

Franchise: Franchise: – Agreement that allows Franchisor (owner of trademark, trade name or copyright) to license to Franchisee the trade mark, trade name or copyright in the sale of goods or services.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7

Types of Franchises: Types of Franchises: – Distributorship. – Chain Style Business Operation. – Manufacturing or Processing Arrangement. Laws Governing Franchising. Laws Governing Franchising. – Primarily governed by contract law.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8

Laws Governing Franchising (cont’d). Laws Governing Franchising (cont’d). – UCC Article 2 governs franchises for sale of goods. – Federal Regulation of Franchises. Industry-Specific Standards: protect franchisee from unreasonable demands and bad faith termination. The FTC Franchise Rule: disclosures.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9

Laws Governing Franchising (cont’d). Laws Governing Franchising (cont’d). – State Protection for Franchisees. Protection from unfair trade practices and bad faith terminations. Disclosure documentation (Franchise Disclosure Document), including costs of operation, recurring expenses, profits earned, and substantiating of these figures. State law may prohibit termination without “good cause.” © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10

The Franchise Contract includes: The Franchise Contract includes: – Payment for the Franchise: lump sum, initial fee. – Business Premises: leased or purchased. – Location of the Franchise.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11

The Franchise Contract (cont’d): The Franchise Contract (cont’d): – Quality Control by Franchisor: good will, reputation and trademark value. Courts will not question Franchisor’s strict supervision but Franchisor may be liable for torts of agents. – Pricing Arrangements: franchisor cannot set prices of goods sold. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12

Generally franchise agreements are more favorable towards the franchisor. Generally franchise agreements are more favorable towards the franchisor. In the event of breach, franchisee may have the opportunity to “cure” an ordinary breach within a period of time to prevent termination. In the event of breach, franchisee may have the opportunity to “cure” an ordinary breach within a period of time to prevent termination. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13

Wrongful Termination. Wrongful Termination. Mac’s Shell Services, Inc. v. Shell Oil Products Co. CASE 31.2 Mac’s Shell Services, Inc. v. Shell Oil Products Co. (2010). Why were the franchisees required to legally sever their relationships with Shell Oil before they could recover? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14

Importance of Good Faith and Fair Dealing. Importance of Good Faith and Fair Dealing. – Courts usually try to balance the rights of both parties. If franchisor arbitrarily or unfairly terminates a franchise, the franchisee will be provided with a remedy for wrongful termination.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15

Importance of Good Faith and Fair Dealing (cont’d). Importance of Good Faith and Fair Dealing (cont’d). – If franchisor’s decision to terminate was made in the normal course of the franchisor’s business operations, and reasonable notice of termination was given to the franchisee, most courts will not consider the termination wrongful. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16