Business Law (Chapter 26) Notes

Opportunity to Cure a Breach

A franchise agreement may state that the franchisee may attempt to cure an ordinary, curable breach within a certain period of time after notice so as to postpone, or even avoid, the termination of the contract.

chain-style business operation

A franchise operates under a franchisor's trade name and is identified as a member of a select group of dealers that engage in the franchisor's business. Examples: McDonalds, Burger King, Wendys

State Disclosures

A number of states have laws similar to the federal rules requiring franchisors to provide presale disclosures to prospective franchisees. A state may require the disclosure of information such as the actual costs of operation, recurring expenses, and profits earned, along with data substantiating these figures.

The Franchise Rule

A rule that requires the franchisor to disclose certain material facts that prospective franchisee needs in order to make an informed decision concerning the purchase of a franchise.

Franchise

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

Degree of Control

As a general rule, the validity of a provision permitting the franchisor to establish and enforce certain quality standards is unquestioned. The franchisor has a legitimate interest in maintaining the quality of the product or service to protect its name and reputation.

The Importance of Good Faith and Fair Dealing

Courts generally try to balance the rights of both parties. If a court perceives that a franchisor has arbitrarily or unfairly terminated a franchise, the franchisee will be provided with a remedy for wrongful termination.

Grounds for Termination

Franchise agreement specifies that termination must be "for cause." Cause might include: 1) Death or disability of the franchisee 2) Insolvency of the franchisee 3) Breach of the franchise agreement 4) Failure to meet specified sales quotas

Pricing Arrangements

Franchises provide the franchisor with an outlet for the firm's goods and services. Depending on the nature of the business, the franchisor may require the franchisee to purchase certain supplies from the franchisor at an established price.

Notice Requirements

Most franchise contracts provide that notice of termination must be given. If no set time for termination is specified, then a reasonable time, with notice, is implied.

Franchisor

One licensing another (the franchisee) to use the owner's trademark, trade name, or copyright in the selling of goods or services.

Franchisee

One receiving a license to use another's (the franchisor's) trademark, trade name, or copyright in the sale of goods and services.

Entrepreneur

One who initiates and assumes the financial risk of a new business enterprise and undertakes to provide or control its management. Primary motive is to make profits.

Industry-Specific Standards

Protect franchisee from unreasonable demands and bad faith termination.

State Regulation of Franchising

State legislation varies but generally is aimed at protecting franchisees from unfair practices and bad faith terminations by franchisors.

Means of Control

The contract often states that the franchisor will establish certain standards for the facility (typically, periodic inspections to ensure that the standards are being maintained).

Federal Regulation of Franchising

The federal government regulates franchising through laws that apply to specific industries and through the Franchise Rule, created by the Federal Trade Commission.

Quality Control by the Franchisor

The franchise agreement may specify that the franchisor will provide some degree of supervision and control so that it can protect the franchises name and reputation

Business Premises

The franchise agreement may specify whether the premises for the business must be leased or purchased outright.

Payment of a Franchise

The franchisee ordinarily pays an initial fee or lump-sum price for the franchise license (the privilege of being granted a franchise).

Sole Proprietorship

The simplest form of business, in which the owner is the business. The owner reports business income on his or her personal income tax return and is legally responsible for all debts and obligations incurred by the business. Small Enterprises. 99% in the United States have revenues less than $1 Million.

Wrongful Termination

The termination provisions of contracts are more favorable to the franchisors and not the franchisees due to the termination of a franchise often has adverse consequences for the the franchisee. Franchisee may receive little or nothing for the business on termination.

Requirements for Termination

To prevent arbitrary or bad faith terminations, state law may prohibit termination without "good cause" or require that certain procedures be followed in terminating a franchising relationship.

Location of the Franchise

Typically, the franchisor will determine the territory to be served. Some franchise contracts give the franchisee exclusive rights, or "territorial rights," to a certain geographic area. Other franchise contracts, though they define the territory allotted to a particular franchise, either specifically state that the franchise is nonexclusive or are silent on the issue of territorial rights.

Distributorship

a manufacturer (the franchisor) licenses a dealer (the franchisee) to sell its product. Examples: Automobile Dealerships and Beer Distributorship

Manufacturing or Processing-Plant Arrangement

the franchisor transmits to the franchisee the essential ingredients or formula to make a particular product. Examples: Pepsi-Cola and other soft-drink bottling companies