Bus Law Final

The Franchise Rule

1. Written disclosure 2. Reasonable basis for any representations. To prevent deception, all representations made to a prospective franchisee must have a reasonable basis at the time they are made. 3.If a franchisor provides projected earnings figures, the franchisor must indicate whether the figures are based on actual data or hypothetical examples. 4. Actual Data 5. Explanation of Terms

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.

Franchise

A franchise is an arrangement in which the owner of intellectual property—such as a trademark, a trade name, or a copy- right—licenses others to use it in the selling of goods or services.

Franchisee

A franchisee (a purchaser of a franchise) is generally legally independent of the franchisor (the seller of the franchise).

Pricing Arrangement

A franchisor cannot, however, set the prices at which the franchisee will resell the goods because such price setting may be a violation of state or federal antitrust laws, or both.

Advantage of the Sole Proprietorship

A major advantage of the sole proprietorship is that the proprietor owns the entire business and receives all of the profits.

Tax for proprietor

A sole proprietor pays only personal income taxes on the business's profits, which are reported as personal income on the proprietor's personal income tax return.

Industry-Specific Standards

An automobile manufacturer-franchisor cannot make unreasonable demands of dealer-franchisees or set unrealistically high sales quotas.

Personal Assets at Risk

Creditors can pursue the owner's personal assets to satisfy any business debts. Although sole proprietors may obtain insurance to protect the business, liability can easily exceed policy limits.

Wrongful Termination

Generally, the termination provisions of contracts are more favorable to the franchisor than to the franchisee.

Degree of Control

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

Notice Requirements

If no set time for termination is specified, then a reason able 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 of the franchisor.

Chan-Style Business Operation

In a 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.

Distributorship

In a distributorship, a manufacturer (the franchisor) licenses a dealer (the franchisee) to sell its product.

Sole Proprietorship

In this form, the owner is the business. Thus, anyone who does business without creating a separate business organization has a sole proprietorship.

Federal Regulation of franchises

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

Business premises

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

Payment for the Franchise

The franchisee ordinarily pays an initial fee or lump-sum price for the franchise license.

Business Organization

The franchisor may require that the business use a particular organizational form and capital structure. The franchise agreement may also set out standards such as sales quotas and record- keeping requirements.

Disadvantages of the Sole Proprietorship

The major disadvantage of the sole proprietorship is that the proprietor alone bears the burden of any losses or liabilities incurred by the business enterprise.

Flexibility

The sole proprietor is free to make any decision he or she wishes concerning the business— such as whom to hire, when to take a vacation, and what kind of business to pursue.

May Require Good Cause to Terminate the Franchise

To protect franchisees against arbitrary or bad faith terminations, state law may prohibit termination without "good cause" or require that certain procedures be followed in terminating a franchise.

State Disclosure

To protect franchisees, a state law might require the disclosure of information such as the actual costs of operation, recurring expenses, and profits earned, along with facts substantiating these figures.

Location of the Franchisee

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.

Means of Control

When the franchise prepares a product, such as food, or provides a service, such as motel accommodations, the contract often states that the franchisor will establish certain standards for the facility.

Lack of Contuinity

When the owner dies, so does the business—it is automatically dissolved.

Manufacturing Arrangement

n a manufacturing, or processing-plant, arrangement, the franchisor transmits to the franchisee the essential ingredients or formula to make a particular product.