Chapter 16 (Franchises)

Question 1

Franchise

Answer 1

Any arrangement in which an owner of a trademark, trade name, or copyright liceneses another to use that trademark, trade name, or coyright in the selling of goods or services

Question 2

Franchisee

Answer 2

One receiving license to use anothers (The Franchisors) trademark, trade name, or copyright in the sales of goods and services

Question 3

Franchisor

Answer 3

One licensing another (franchisee) to use the owners trademark, trade name, or copyright in the selling of goods and services

Question 4

A franchiseis gnerally frinancially independent of the franchise, but at the same time is economially dependent on the Franchisors integrated business system

Answer 4

Franchise companies and their franchisees account for a significant portion of all retail sales in the US. EX: McDonalds, 7-11, Holiday Inn

Question 5

Franchising has beome a popular way for businesses to expand their operations internationally without violating the legal restrictions that many nations impose on foreign ownership of businesses.

Question 6

Generally Franchises Fall into 3 classifications

Answer 6

1. Distributorships
2. Chain-Style Business operations
3. Manufacturing arrangment

Question 7

Distributorships

Answer 7

In a distrivutorship, a manufacturer (the franchisor) licenses a dealer (the franchisee) to sell its product
- Often, a distributor convers an exclusive territory
Ex: Automobile dealerships, beer distributors

Question 8

Chain-Style business operations

Answer 8

In a chain style Business operation, a franchise operates under a frachisors tradename and is identified as a member of a select group of dealers that engage in a franchisors business

• The franchisee is generally required to follow stanardized or prescibes methods of operation
• Often, the feanchisor insists that the franchisee maintain certain standards or performance
• The franchisee may be rewuried to obtain mertials and supplies exclusivly from the francisor

Question 9

Manufacturing Arrangement

Answer 9

In a manufacturing, or processing-plant, arrangement:
- The franchisor transmit to the franchisee the essential ingredients or formula to make a particular product
- The franchisee then markets the product either at wholesale or at retail in accordance with the franchisor’s standards (Examples: Soft-drink bottling companies)

Question 10

Laws Governing Franchising

Answer 10

Because a franchise relationship is primarily a contractual relationship, it is governed by contract law
The federal government and most states have enacted laws governing certain aspects of franchising
- Generally, these laws are designed to:
- Protect prospective franchisees from dishoenst franchisors
- Prevent franchisors from terminating franchises without good cause

Question 11

Federal Regulation of Franchises

Answer 11

The federal government regulates Franchising through laws that apply to specific industries and through the Franchise Rule, created by the Federal Trade Commision (FTC)

• Congress has enacted lws that protect franchisees in certain industries, such as automobile dealerships and service stations, from unreasonable demands and bad faith terminations of the franchise by the franchisor
• The FTC’s Franchise Rule requires franchisors to disclose certain matrials facts that a prospective frachanisee needs to order to make an informaed decision conerning the purchase of a franchise

Question 12

The FTC’s Franchise Rule Requirements

Requirement:

Written (or Electronic) Disclosures

Answer 12

Explanation:
The franchisor must make numerous disclosures, such as the range of goods and services included and the value and estimated profitability of the franchise. Disclosures can be delivered on paper or electronically. Prospectice frachisees must be able to downlaod or save any electronic disclosure documents

Question 13

The FTC’s Franchise Rule Requirements

Requirement:

Reasonable Basis for Any Representations

Answer 13

To prevent deception, all represenation made to a prospective franchisee must have a reasonable basis at the time they are made

Question 14

The FTC’s Franchise Rule Requirements

Requirement:

Projected Earnings Figures

Answer 14

If a franchisor provides projected earning figures, the franchisor must indicate whether the figures are based on actual data or hypothetical examples. The Franchise Rule does not require franchisors to provide potential earnings figures

Question 15

State Regulation of Franchising

Answer 15

State legislation varies but often is aimed at protecting franchisees from unfair practices and bad faith terminitions by franchisors

-State laws may require that a franchisor submit adversiting aimed at prospective franchisees to the state for approval
- State laws related to deceptive trade practices may apply and prohibit certain types of actions by franchisors
- To prevent arbitary or bad faith temrinations, a state law may:
-Prohibit termination without good cause
- Require that certain procedures be followed in terminating a franchise

Question 16

The Franchise Contract

Answer 16

• Specifies the terms and conditions of the franchise
• Spells out the rights and duties of the franchisor and the franchisee
  - If either party fails to perform its contractual duties, that party may be subject to a lawsuit for breach of contract

The franchise relationship is defined by the contract between the franchisor and the franchisee

Question 17

Business Premises

Answer 17

• The franchise agreement may specify whether the premises for the business must be leased or purchased outright
• The agreement will specfify whether the franchisor or the franchisee is responsible for supplying equipment and furnishing for the premises

Question 18

Location of the Franchise

Answer 18

Typically, the franchisor determines the territory to be served

• Some franchise contracts give the franchisee exclusive rights, or “territorial rights”, to a certain geographic area
• Other franchise contracts either specifically state the franchise is nonexclusive or are silent on the issue of territorial rights

Question 19

Quality control by the Franchisor

Although the day-to-day operation of the franchise business normally is left up to the franchise, the franchise agreement may specify that the franchisor will provide some degree of supervision and control so that it can protect the franchise’s name and reputation

If a franchisor exercises too much control over the operations of its franchisees, the franchisors risks potential liability

Answer 19

• Typically, the contract will state that the franchisor will establish certian standards for the facility and is permitted to make periodic inspections to ensure that the standards are being maintained
• As a means of controlling quality, franchise agreements typically limit the franchisee’s ability to sell the franchise to another party

Question 20

The duration of the franchise is a matter to be determiend between the parties

Answer 20

• Sometimes, a franchise relationship starts with a short trial period, such as a yearm so that the franchisee and the franchisor can determine whether they want to stay in business with one another
• At other times, the duration of the franchise contract correlates with the term of the lease for the business premises, and both are renewable at the end of that period

Question 21

Grounds for Termination Set bu the Franchise Contract

Usually the franchise agreement specifies that termination must be “for cause” and then defines the grounds for termination.

Causes might include:

Answer 21

• The dealth or disability of the franchisee
• Insolvency of the franchisee
• Branch of the franchise agreement
• Failure to meet specified sales quotas

Question 22

Most franchise contracts provide that notice of temrination must be given

Answer 22

• If no set time for termination is specified, then a reasonable time, with notice, is implied.
  • A franchisee must be given reasonable time to wind up the business- that is to do the accounting and return the copyright or trademark or any other property to the franchisor

Question 23

Franchise Termination

Answer 23

A franchise agreement may allow the franchisee to attempt to cure an ordinary, curable breach within a certain time after notice so as to postpone, or even avoid termination

Question 24

Wrongful termination

Answer 24

• Generally, the termination provisions of contracts are more favoriable to the franchisor than to the franchisee
  
  • This means that the franchisee, who normally invests substantial time and financial resources in making the franchise operation successful, may recieve little or nothing for business on termination
• Federal and state laws attempt to protect franchisees from the arbitary or unfair termination of their franchises by the franchisors

Question 25

The Importance of Good Faith and Fair Dealing

Answer 25

• Both statutory law and case law emphasize the importance of good faith and fair dealing in terminating a franchise relationship
  
  • In determining whether a franchisor has acted in good faith when terminating a franchise agreement, the courtd usually try to balance the rights of both parties
• If a court percieves that a franchisor has arbitrarily or unfairly terminated a franchise, the franchise will be provided with a remedy for wrongful termination

Question 26

A court will be less likely to consider a termination wrongful:

Answer 26

• If the franchisors decision was made in the normal course of business
• If reasonable notice was given