Chapter 40 Franchises and Special Forms of Business

Chapter 40 Franchises and Special Forms of Business

Franchise

Key Term Description

Franchise An arrangement that is established when one party licenses another party 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 (licensor)

The party who grants the franchise and license to a franchisee in a franchise arrangement

Franchisee (licensee)

The party who is granted the franchise and license by a franchisor in a franchise arrangement

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 40-2

Exhibit 40.1 - Franchise


Types of Franchises

Distributorship franchise: A franchisor manufactures a product and licenses a franchisee to distribute the product to the public

Processing plant franchise: A franchisor provides Secret formula or process to the franchisee The franchisee manufactures the product and

distributes it to retail dealers


Types of Franchises

Chain-style franchise: A franchisor licenses a franchisee to Make and sell its products Distribute its services to the public from a retail

outlet serving an exclusive territory Area franchise: A franchisor authorizes a franchisee

to negotiate and sell franchises on its behalf in designated areas The area franchisee is called a subfranchisor


Exhibit 40.2 - Area Franchise


FTC Franchise Rule

Federal Trade Commission (FTC): A federal government agency that is empowered to enforce federal franchising rules

FTC franchise rule: A rule set out by the FTC Requires franchisors to make full presale

disclosures to prospective franchisees Registration of the disclosure document with the FTC

prior to its use is not required


Disclosure of Sales or Earnings ProjectionsBased on Actual Data

For projections based on the actual sales, income, or profit figures of an existing franchise, the franchisor must disclose the following The number and percentage of its actual franchises

that have obtained such results A cautionary statement in at least 12-point

boldface type


Disclosure of Sales or Earnings ProjectionsBased on Hypothetical Data

The franchisor must disclose the following Assumptions underlying the estimates Number and percentage of actual franchises that

have obtained projected results A cautionary statement in at least 12-point

boldface print


FTC Franchise Notice

A statement required by the FTC to appear in at least 12-point boldface type on the cover of a franchisor’s required disclosure statement to prospective franchisees

State disclosure laws Uniform Franchise Offering Circular (UFOC):

A uniform disclosure document that requires a franchisor to make specific presale disclosures to prospective franchisees


Franchise Agreement

An agreement that a franchisor and franchisee enter into It sets forth the terms and conditions of a franchise

Trademark or service mark: A distinctive mark, symbol, name, word, motto, or device that identifies the goods or services of a particular franchisor

Trade secrets: Ideas that make a franchise successful but that do not qualify for trademark, patent, or copyright protection


Topics Included in a Franchise Agreement

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Topics Included in a Franchise Agreement

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Liability of Franchisor and Franchisee

For a properly organized and operated franchise, the franchisor and franchisee are separate legal entities

Franchisor deals with the franchisee as an independent contractor

Franchisors are liable for their own contracts and torts Neither party is liable for the contracts or torts of

the other


Case 40.1: Franchise Liability

Rainey v. Domino’s Pizza, LLC 998 A.2d 342, Web 2010 Me. Lexis 56 (2010) Supreme Judicial Court of Maine

Issue Under the facts of this case, can Domino’s be held

vicariously liable for the alleged negligence of its franchisee TDBO?


Case 40.2: Franchisor Liability

Martin v. McDonald’s Corporation 572 N.E.2d 1073, Web 1991 Ill.App. Lexis 715 Court of Appeals of Illinois

Issue Is McDonald’s liable for negligence?


Apparent Agency

Agency that arises when A franchisor creates the appearance that a

franchisee is its agent when in fact an actual agency does not exist

The franchisor is liable for the contracts entered into and torts committed by the franchisee acting as an apparent agent


Termination of a Franchise

Franchise agreements permit a franchisor to terminate the franchise for cause Unreasonably strict application of a just cause

termination clause constitutes wrongful termination

Termination-at-will clauses – void on the grounds that they are unconscionable Franchisee can recover damages caused by the

unlawful termination and recover the franchise


Breach of the Franchise Agreement

Franchise agreement is an enforceable contract Breach of contract

Aggrieved party can sue the breaching party for rescission of the agreement, restitution, and damages


Licensing

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

Licensor: The party who grants a license Licensee: The party to whom a license is granted


Exhibit 40.3: License


Joint Venture

An arrangement in which two or more business entities combine their resources to pursue a single project or transaction

Joint venture partnership: A partnership owned by two or more joint venturers that is formed to operate a joint venture

Joint venture corporation: A corporation owned by two or more joint venturers that is created to operate a joint venture


Exhibit 40.4 - Joint Venture Partnership


Exhibit 40.5 - Joint Venture Corporation


Strategic Alliance

An arrangement between two or more companies whereby they agree to ally themselves and work together to accomplish a designated objective Allows the companies to reduce risks, share costs,

combine technologies, and extend their markets


40-26Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

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Chapter 40 Franchises and Special Forms of Business