franchises and special forms of business

Chapter Eight

Franchises and Special Forms of Business

Business Organizations for ParalegalsReed and Cheeseman

© 2012 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights Reserved.2 29 - 239 - 2

Chapter Eight – Objectives

1. Define franchise and describe the various forms of franchises.

2. Describe the rights and duties of the parties to a franchise agreement.

3. Identify the contract tort liability of franchisors and franchisees.

4. Define licensing and describe how trademarks and intellectual property are licensed.

5. Describe how international franchising, joint ventures, and strategic alliances are used in global commerce.



Franchising is an important Franchising is an important method of distributing goods method of distributing goods and services to the public.and services to the public.

In the United States, In the United States, franchising accounts for over franchising accounts for over 25 percent of retail sales and 25 percent of retail sales and 15 percent of gross domestic 15 percent of gross domestic product (GDP).product (GDP).



Franchise

Established when franchisor licenses franchisee 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 and the franchisee are usually established as separate corporations.



Advantages to Franchising

1. The franchisor can reach lucrative new markets.

2. The franchisee has access to the franchisor’s knowledge and resources.

3. Franchisee runs an independent business.

4. Consumers are assured of uniform product quality.



Parties to a Typical Franchise Agreement

Grant of franchise and Grant of franchise and license to use trademarks, license to use trademarks, service marks, and trade service marks, and trade secretssecrets

Franchisor Franchisor (Licensor)(Licensor)

Franchisee Franchisee (Licensee)(Licensee)



Distributorship Franchise

Franchisor manufactures a product and licenses a retail franchisee to distribute the product to the public. Ford Motor Company manufactures automobiles

and franchises independently owned dealers to sell them to the public.



Processing Plant Franchise

Franchisor provides a secret formula or process to the franchisee.

Franchisee manufactures the product and distributes it to retail dealers. Coca-Cola Corporation licenses regional bottling

companies to manufacture and distribute soft drinks under the “Coca-Cola” brand name.



Chain-style Franchise

Franchisor licenses the franchisee to make and sell its products or distribute services to the public from a retail outlet serving an exclusive territory. Pizza Hut Corporation franchises independently

owned restaurant franchises to make and sell pizzas to the public under the “Pizza Hut” name.



Area Franchises

Franchisee may be granted the authority to negotiate and sell franchises in the designated area on behalf of the franchisor. Franchisee is also called the subfranchisor.



Example of an Area FranchiseArea Area FranchiseFranchise

FranchisorFranchisor

FranchiseFranchise

FranchiseFranchise

FranchiseFranchise

SubfranchisorSubfranchisor

FranchiseeFranchisee FranchiseeFranchisee FranchiseeFranchisee



State Disclosure Laws

Many states have enacted statutes that require franchisors to make specific presale disclosures to prospective franchisee.

Most states use a uniform disclosure statement called the Uniform Franchise Offering Circular (UFOC).



FTC Franchise Rule

The FTC requires franchisors to make presale disclosures to prospective franchisees.

The franchisor must disclose assumptions underlying any estimates and hypothetical data.

If projections are based on actual data, franchisor must disclose specifics.

The franchisor must provide a mandated precautionary statement.



Trademarks

A franchisor licenses the use of its trademarks and service marks in the franchise agreement.

Anyone who uses a mark without authorization from the franchisor may be sued for trademark infringement.

The franchisor can recover damages and obtain an injunction prohibiting further unauthorized use of the mark.



Misappropriation of Trade Secrets

Anyone who steals and uses a franchisor’s trade secret is liable for misappropriation of a trade secret.

The franchisor can recover damages and obtain an injunction prohibiting further unauthorized use of the trade secret.



The Franchise Agreement

An agreement that the franchisor and the franchisee enter into that sets forth the terms and conditions of the franchise. Quality control standards Training requirements Covenant not to compete Arbitration clause Use of franchisor’s trade name, logo, and trademark Conditions for the termination of the franchise



Franchise Fees

Franchise fees payable by the franchise are usually stipulated in the franchise agreement. Initial license fee Royalty fee Assessment fee Lease fee Cost of supplies



Termination of Franchises

Termination “For Termination “For Cause”Cause”

Termination At WillTermination At Will

Wrongful TerminationWrongful Termination



Termination “For Cause”

A franchisor can terminate a franchise agreement for “just cause.” Nonpayment of franchise fees by the franchisee Continued failure to meet quality control standards



Termination at Will

Most state and federal laws regarding franchising prohibit franchisors from terminating the franchises at will.

Prevents a franchisor from taking advantage of the good will developed at the franchise location by the franchisee.



Wrongful Termination

If a franchisor terminates a franchise agreement without just cause, the franchisee can sue the franchisor for wrongful termination.

The franchisee can recover damages caused by the wrongful termination and recover the franchise.



Breach of the Franchise Agreement

Lawful franchise agreement is an enforceable contract.

Each party owes a duty to adhere to and perform under the terms of the franchise agreement.

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



Independent Contractor Status

If properly organized and operated, the franchisor and franchisee are separate legal entities.

The franchisor deals with the franchisee as an independent contractor. A franchisee is not the agent of the franchisor. The franchisor is not liable for the franchisee’s

contracts and torts.



Contract and Tort Liability

Franchisors and franchisees are liable for their own contracts.

Franchisors and franchisees are liable for their own tort liability. If a person is injured by a franchisee’s negligence,

the franchisee is liable.



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.



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. Trademarks, service marks, trade names, copyrights

Licenses issued for distribution of goods, services, software, and digital information.



Joint Venture

A joint venture is an arrangement where two or more business entities combine their resources to pursue a single project or transaction. Joint venturers have equal rights to manage the

joint venture Joint ventures owe each other the fiduciary duties

of loyalty and care. Joint venturer liable for the damages a breach

causes.



Joint Venture Partnership

Joint venture operated as a partnership. Each joint venturer is considered a partner of the

joint venture.

Each joint venturer is liable for the debts and obligations of the joint venture partnership.



Joint Venture(continued)

Joint Venturer

Joint Venturer

Joint Venture

Partnership

Investment of capital

Investment of capital



Joint Venture Corporation

Two or more joint venturers create a third corporation to operate a joint venture.

The joint venturers are shareholders of the joint venture corporation.

The joint venture corporation is liable for its own debts and obligations.



Strategic Alliance

An arrangement between two or more companies in the same industry.

Companies agree to ally themselves to accomplish a designated objective. Strategic alliances do not have the same protection

as mergers, joint ventures, or franchising.



Chapter Eight – Recap

1. Define franchise and describe the various forms of franchises.

2. Describe the rights and duties of the parties to a franchise agreement.

3. Identify the contract tort liability of franchisors and franchisees.

4. Define licensing and describe how trademarks and intellectual property are licensed.

5. Describe how international franchising, joint ventures, and strategic alliances are used in global commerce.