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

CHAPTER 35 CHAPTER 35 FRANCHISINGFRANCHISINGCHAPTER 35 CHAPTER 35 FRANCHISINGFRANCHISING

DAVIDSON, KNOWLES & FORSYTHE DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles Business Law: Cases and Principles

in the Legal Environmentin the Legal Environment (8 (8thth Ed.) Ed.)

2© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning

BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.

SIGNIFICANCE OF FRANCHISINGSIGNIFICANCE OF FRANCHISINGSIGNIFICANCE OF FRANCHISINGSIGNIFICANCE OF FRANCHISING

Franchising has helped the United States Franchising has helped the United States become world’s largest market.become world’s largest market.

Currently, over 2,000 U. S. companies Currently, over 2,000 U. S. companies encompassing over 40 different economic encompassing over 40 different economic sectors use this business method.sectors use this business method.

Franchising has developed into important Franchising has developed into important and popular method of marketing and and popular method of marketing and distributing business goods and services.distributing business goods and services.



DEFINITIONDEFINITIONDEFINITIONDEFINITIONFranchise.Franchise.

– Oral or written agreement.Oral or written agreement.– Expressed or implied agreement.Expressed or implied agreement.– Franchisor grants to franchisee license to use: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.Franchisee must pay licensing fee.



DEFINITIONDEFINITIONDEFINITIONDEFINITIONFranchises into three categories:Franchises into three categories:

– Trade name franchising: Franchisee purchases the Trade name franchising: Franchisee purchases the right to identify with Franchisor’s trade name.right to identify with Franchisor’s trade name.

– Product distributorships: Franchisor licenses Product distributorships: Franchisor licenses Franchisee to sell its product exclusively or with Franchisee to sell its product exclusively or with other products via limited distribution network.other products via limited distribution network.

– Pure franchises: Franchisee operates under Pure franchises: Franchisee operates under Franchisor’s trade name subject to Franchisor’s Franchisor’s trade name subject to Franchisor’s operating methods.operating methods.



BENEFITS OF FRANCHISINGBENEFITS OF FRANCHISINGBENEFITS OF FRANCHISINGBENEFITS OF FRANCHISING

Benefits to franchisee include:Benefits to franchisee include:– Opportunity to start business despite limited Opportunity to start business despite limited

capital and experience.capital and experience.– Goodwill.Goodwill.– Availability of franchisor’s business expertise.Availability of franchisor’s business expertise.– Assured supply of materials and access to Assured supply of materials and access to

training and supervision.training and supervision.



BENEFITS OF FRANCHISINGBENEFITS OF FRANCHISINGBENEFITS OF FRANCHISINGBENEFITS OF FRANCHISING

Benefits to franchisor include: Benefits to franchisor include: – Franchisee’s investment of capital.Franchisee’s investment of capital.– Goodwill.Goodwill.– Availability of an assured distribution network.Availability of an assured distribution network.– Larger asset base.Larger asset base.



FRANCHISING COMPARED FRANCHISING COMPARED WITH OTHER RELATIONSHIPSWITH OTHER RELATIONSHIPS

FRANCHISING COMPARED FRANCHISING COMPARED WITH OTHER RELATIONSHIPSWITH OTHER RELATIONSHIPSGovernment view franchisor-franchisee Government view franchisor-franchisee

relationship as employment relationship.relationship as employment relationship.Ordinarily not deemed franchises are:Ordinarily not deemed franchises are:

– Cooperatives.Cooperatives.– Concessionaires.Concessionaires.– Joint ventures.Joint ventures.– General partnerships. General partnerships. – Sales agencies.Sales agencies.– Securities.Securities.



SETTING UP THE SETTING UP THE FRANCHISING RELATIONSHIPFRANCHISING RELATIONSHIP

SETTING UP THE SETTING UP THE FRANCHISING RELATIONSHIPFRANCHISING RELATIONSHIPFranchisor will:Franchisor will:

– Choose franchise location.Choose franchise location.– Creates training programs. Creates training programs. – Advertises the product.Advertises the product.– Set stringent guidelines.Set stringent guidelines.




SETTING UP THE SETTING UP THE FRANCHISING RELATIONSHIPFRANCHISING RELATIONSHIPFranchisee will:Franchisee will:

– Follow Franchisor’s operating procedures.Follow Franchisor’s operating procedures.– Obtain liability insurance.Obtain liability insurance.– Meet workers’ compensation requirements.Meet workers’ compensation requirements.

Franchise agreements require franchisee to:Franchise agreements require franchisee to:– Buy from only certain suppliers.Buy from only certain suppliers.– Provide factors that could cause termination.Provide factors that could cause termination.– Contain covenants not to compete.Contain covenants not to compete.




SETTING UP THE SETTING UP THE FRANCHISING RELATIONSHIPFRANCHISING RELATIONSHIPBecause franchisees have limited Because franchisees have limited

bargaining power, federal and state law are bargaining power, federal and state law are designed to protect franchisees when designed to protect franchisees when entering and terminating their agreements. entering and terminating their agreements.



LAW AND STATUTES LAW AND STATUTES AFFECTING FRANCHISINGAFFECTING FRANCHISING


Several statutes have attempted to protect Several statutes have attempted to protect franchisees against abuses by Franchisors.franchisees against abuses by Franchisors.

In shaping relief, courts turn to common law, In shaping relief, courts turn to common law, powers of equity, or applicable statutes.powers of equity, or applicable statutes.

Statutes have improved the bargaining Statutes have improved the bargaining position of franchisees.position of franchisees.

Federal Trade Commission has promulgated Federal Trade Commission has promulgated trade regulation rule on franchise disclosure.trade regulation rule on franchise disclosure.





Antitrust laws may apply to aspects of Antitrust laws may apply to aspects of franchising relationship. franchising relationship.

Franchisors may terminate franchisee for:Franchisors may terminate franchisee for:– Misconduct;Misconduct;– Failure to meet sales quotas;Failure to meet sales quotas;– Failure to observe quality standards; orFailure to observe quality standards; or– Failure to maintain investment levels.Failure to maintain investment levels.

Franchises are subject to antitrust law and the Franchises are subject to antitrust law and the UCC.UCC.



CHALLENGES TO FRANCHISING CHALLENGES TO FRANCHISING REGULATORY STATUTESREGULATORY STATUTES

CHALLENGES TO FRANCHISING CHALLENGES TO FRANCHISING REGULATORY STATUTESREGULATORY STATUTES

Because laws that protect franchisees also Because laws that protect franchisees also limit actions of franchisors, franchisors limit actions of franchisors, franchisors have challenged laws on constitutional have challenged laws on constitutional grounds.grounds.

Challenges include:Challenges include:– Impairment of the obligation of contracts;Impairment of the obligation of contracts;– Due process;Due process;– Federal supremacy; andFederal supremacy; and– Interstate commerce.Interstate commerce.



THE FRANCHISING THE FRANCHISING ENVIRONMENTENVIRONMENT

THE FRANCHISING THE FRANCHISING ENVIRONMENTENVIRONMENT

Industry Statistics:Industry Statistics:– International Franchise Association has International Franchise Association has

promoted franchising as robust and viable promoted franchising as robust and viable method of conducting business. method of conducting business.

– Government reports that franchises account for Government reports that franchises account for 34% of all retail sales in the U.S.34% of all retail sales in the U.S.

– Reports dispute data that indicate low failure Reports dispute data that indicate low failure rates for franchises.rates for franchises.

– Research has questioned the meaning of the Research has questioned the meaning of the numbers.numbers.



INTERNATIONAL MARKETSINTERNATIONAL MARKETS

Industry data has not stanched the Industry data has not stanched the expansion of U.S. franchisees abroad.expansion of U.S. franchisees abroad.

Recent statistics show, Canada, Japan and Recent statistics show, Canada, Japan and Australia are the three largest markets for Australia are the three largest markets for U.S. franchisors.U.S. franchisors.

Foreign franchisors are setting up in the Foreign franchisors are setting up in the U.S.U.S.

Documents

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