CHAPTER 35 FRANCHISING DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 SIGNIFICANCE OF FRANCHISING Franchising has helped the United States become world’s largest market. Franchising has helped the United States become world’s largest market. Currently, over 2,000 U. S. companies encompassing over 40 different economic sectors use this business method. Currently, over 2,000 U. S. companies encompassing over 40 different economic sectors use this business method. Franchising has developed into important and popular method of marketing and distributing business goods and services. Franchising has developed into important and popular method of marketing and distributing business goods and services.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 DEFINITIONDEFINITION Franchise. Franchise. – Oral or written agreement. – Expressed or implied agreement. – Franchisor grants to franchisee license to use: Trade name. Trade name. Service mark. Service mark. Trademark. Trademark. Advertising. Advertising. Other symbol. Other symbol. – Franchisee must pay licensing fee.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 DEFINITIONDEFINITION Franchises into three categories: Franchises into three categories: – Trade name franchising: Franchisee purchases the right to identify with Franchisor’s trade name. – Product distributorships: Franchisor licenses Franchisee to sell its product exclusively or with other products via limited distribution network. – Pure franchises: Franchisee operates under Franchisor’s trade name subject to Franchisor’s operating methods.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 BENEFITS OF FRANCHISING Benefits to franchisee include: Benefits to franchisee include: – Opportunity to start business despite limited capital and experience. – Goodwill. – Availability of franchisor’s business expertise. – Assured supply of materials and access to training and supervision.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 BENEFITS OF FRANCHISING Benefits to franchisor include: Benefits to franchisor include: – Franchisee’s investment of capital. – Goodwill. – Availability of an assured distribution network. – Larger asset base.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 FRANCHISING COMPARED WITH OTHER RELATIONSHIPS Government view franchisor-franchisee relationship as employment relationship. Government view franchisor-franchisee relationship as employment relationship. Ordinarily not deemed franchises are: Ordinarily not deemed franchises are: – Cooperatives. – Concessionaires. – Joint ventures. – General partnerships. – Sales agencies. – Securities.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 SETTING UP THE FRANCHISING RELATIONSHIP Franchisor will: Franchisor will: – Choose franchise location. – Creates training programs. – Advertises the product. – Set stringent guidelines.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 SETTING UP THE FRANCHISING RELATIONSHIP Franchisee will: Franchisee will: – Follow Franchisor’s operating procedures. – Obtain liability insurance. – Meet workers’ compensation requirements. Franchise agreements require franchisee to: Franchise agreements require franchisee to: – Buy from only certain suppliers. – Provide factors that could cause termination. – Contain covenants not to compete.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 SETTING UP THE FRANCHISING RELATIONSHIP Because franchisees have limited bargaining power, federal and state law are designed to protect franchisees when entering and terminating their agreements. Because franchisees have limited bargaining power, federal and state law are designed to protect franchisees when entering and terminating their agreements.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 LAW AND STATUTES AFFECTING FRANCHISING Several statutes have attempted to protect franchisees against abuses by Franchisors. Several statutes have attempted to protect franchisees against abuses by Franchisors. In shaping relief, courts turn to common law, powers of equity, or applicable statutes. In shaping relief, courts turn to common law, powers of equity, or applicable statutes. Statutes have improved the bargaining position of franchisees. Statutes have improved the bargaining position of franchisees. Federal Trade Commission has promulgated trade regulation rule on franchise disclosure. Federal Trade Commission has promulgated trade regulation rule on franchise disclosure.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 LAW AND STATUTES AFFECTING FRANCHISING Antitrust laws may apply to aspects of franchising relationship. Antitrust laws may apply to aspects of franchising relationship. Franchisors may terminate franchisee for: Franchisors may terminate franchisee for: – Misconduct; – Failure to meet sales quotas; – Failure to observe quality standards; or – Failure to maintain investment levels. Franchises are subject to antitrust law and the UCC. Franchises are subject to antitrust law and the UCC.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 CHALLENGES TO FRANCHISING REGULATORY STATUTES Because laws that protect franchisees also limit actions of franchisors, franchisors have challenged laws on constitutional grounds. Because laws that protect franchisees also limit actions of franchisors, franchisors have challenged laws on constitutional grounds. Challenges include: Challenges include: – Impairment of the obligation of contracts; – Due process; – Federal supremacy; and – Interstate commerce.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 THE FRANCHISING ENVIRONMENT Industry Statistics: Industry Statistics: – International Franchise Association has promoted franchising as robust and viable method of conducting business. – Government reports that franchises account for 34% of all retail sales in the U.S. – Reports dispute data that indicate low failure rates for franchises. – Research has questioned the meaning of the numbers.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 INTERNATIONAL MARKETS Industry data has not stanched the expansion of U.S. franchisees abroad. Industry data has not stanched the expansion of U.S. franchisees abroad. Recent statistics show, Canada, Japan and Australia are the three largest markets for U.S. franchisors. Recent statistics show, Canada, Japan and Australia are the three largest markets for U.S. franchisors. Foreign franchisors are setting up in the U.S. Foreign franchisors are setting up in the U.S.