Chapter 39 Special Business Forms and Private Franchises

§ 1: Special Business Forms Joint Venture: two or more entities combine efforts or property for a single transaction or project. Unless agreed otherwise, JV’s share profits and losses equally. Common in international transactions when U.S. companies wish to expand overseas.

JV Characteristics Resembles a partnership and is taxed like a partnership. However, a JV is limited in time and scope, whereas a partnership is an ongoing business. Other differences: JV members has less implied and apparent authority than partners. Death of JV member does not terminate JV. JV members can specify duration. If not, then JV terminates when purpose is accomplished.

JV Rights and Liabilities JV members owe a fiduciary duty to each other (loyalty, no conflicts of interest). JV members have equal right to manage the business.

Other Entities Syndicate (Investment Group): group of individuals getting together to finance a particular project. Joint Stock Company is a hybrid of partnership and corporation: (1) ownership represented by shares of stock; (2)managed by directors and officers of the company; and (3) can have a perpetual existence.

Other Entities [2] Business Trust is created by a written agreement setting forth the interests of the beneficiaries and obligations and powers of trustees. Legal ownership and management of property remains with trustees and profits distributed to the beneficiaries. Cooperative is an association organized to provide a not-for-profit service to members.

§ 2: Private Franchises Franchisor (Owner of trademark, trade name or copyright) licenses Franchisee to use the trade mark, trade name or copyright in the sale of goods or services. Distributorship. Chain Style Business Operation. Manufacturing or Processing Arrangement.

Franchising [2] Governed by commercial sales and contract law. If franchise is primarily for the sale of goods, UCC Article 2 governs. State and federal laws regulate franchising to protect franchisee. The contract states parties’ rights and duties and can include an exclusive “territory” to market goods/services.

Franchising [3] Franchise contract can specify Franchisee’s type of business entity including capital structure, sales quotas and record keeping. Quality Control is a legitimate issue for Franchisor because of good will, reputation and trademark value. Courts will not question Franchisor’s strict supervision but Franchisor may be liable for torts of agents.

Case 39.1: Ultralite Container v. American President Lines (Joint Venture) FACTS: APL & Stoughton Composites formed a joint venture, Ultralite Container Corporation. APL contributed capital. Stoughton contributed its expertise. The parties signed confidentiality agreements that prohibited each from using in its own business, or transferring to others, information disclosed by the other party as part of the joint venture. As per their contract, Stoughton produced and delivered the first containers, but APL refused to pay for them.

FACTS (con’td) Meanwhile, Stoughton began using what it had learned to make and market over-the-road containers for its own business. Stoughton and Ultralite sued APL, alleging breach of contract. APL counterclaimed, asking the court to order Stoughton not to use what APL argued was confidential information—the know ‑ how to produce thin walled shipping containers. Case 39.1: Ultralite Container v. American President Lines (Joint Venture)

HELD: FOR STOUGHTON. The parties’ confidentiality agreements did not prevent Stoughton from using the joint venture’s intellectual property, which it had developed from knowledge and expertise that it already possessed. “This joint venture was designed to jump off from intellectual property Stoughton already possessed… Nothing in the [confidentiality] agreements demonstrates that the parties were this self ‑ destructive. Case 39.1: Ultralite Container v. American President Lines (Joint Venture)

Case 39.2: Miller v. Zee’s (Franchisor’s Liability) FACTS: Zee’s owns a Denny’s restaurant in Tualatin, Oregon. Under the franchise agreement, Zee’s agreed to train and supervise employees in accordance with Denny’s Operations and Food Service Standards Manuals. Denny’s regularly sent inspectors to assess compliance and reserved the right to terminate the franchise for noncompliance. Denny’s logo was displayed throughout the restaurant, and there was no indication that its owners were other than “Denny’s.”

FACTS (cont’d) Christine Miller worked as a server at the restaurant. After several incidents of sexually inappropriate comments and conduct, Miller complained to Stanley Templeton, the manager. Finally, Miller and three other employees filed a suit in a federal district court against Zee’s, Denny’s, and others. Denny’s filed a motion for summary judgment, contending in part that a franchisor cannot be held liable for harassment by franchise employees. Case 39.2: Miller v. Zee’s (Franchisor’s Liability)

HELD: MOTION TO DISMISS DENIED. Denny’s was responsible for the acts of harassment by the employees at the Tualatin restaurant, because the employees were the agents of Denny’s. Denny’s enforced this requirement by conducting regular inspections and by retaining the power to cancel the agreement for noncompliance. In particular, the manuals gave Denny’s the right of control “in the precise parts of the franchisee’s business that allegedly resulted in plaintiffs’ injuries—training and discipline of employees.” Case 39.2: Miller v. Zee’s (Franchisor’s Liability)

Case 39.3: GM v. Monte Zinn Chevrolet (Francise Termination) FACTS: Zinn operated Zinn Chevrolet and Zinn Motor Company under separate franchise agreements with GM, Chrysler and Toyota. Each agreement permitted the franchisor to terminate the dealership if the dealer was convicted of a felony. When Zinn plead guilty to committing a felony, the franchisors terminated the franchises. Zinn sued the franchisors for breach of contract.

HELD: The state intermediate appellate court affirmed the lower court’s decision, citing Zinn’s felony conviction and other circumstances that supported the franchisors’ action. The court explained that the facts “all weigh in favor of finding good cause to terminate the franchise[s].” In addition, the Zinn companies “performed poorly in service-related areas” and their “scores on owner loyalty” were below average. Case 39.3: GM v. Monte Zinn Chevrolet (Francise Termination)