Chapter 40: Franchise and Special Forms of Business terms

liability of franchisor and franchisee

if a franchise is properly organized and operated, the franchisor and franchisee are separate legal entities, therefore, the franchisor deals with the franchisee as an independent contractor ... generally, neither party is liable for the contracts or torts of the other

termination of a franchise

most franchise agreements permit a franchisor to terminate the franchise for cause (i.e. continued failure of a franchisee to pay franchise fees), however, a single failure to meet a quality-control standard is not a cause for termination

licensing

a business arrangement that occurs when the owner of intellectual property (the licensor) contracts to permit another party (the license) to use the intellectual property (i.e. Walt Disney allows Beijing manufacturer to manufacture and distribute clothing with the Winnie the Pooh characters)

trade secrets

ideas that make a franchise successful but that do not qualify for trademark, patent, or copyright protection (i.e. product [Coca-cola] formulas, business plans, and models, etc); franchisors license and disclose many of their trade secrets to franchisees

covenants not to compete

prohibit franchisees from competing with the franchisor during a specific time and in a specified area after the termination of the franchise

arbitration clause

provides that any claim or controversy arising from the franchise agreement or an alleged breach thereof is subject to arbitration

breach of the franchise agreement

franchise agreements are enforceable contracts; if breached, the aggrieved party can sue the breaching party for rescission of the agreement, restitution, and damages

disclosure of sales or earnings projections based on hypothetical data

franchisors must disclose (1) assumptions underlying the estimates (2) the number and percentage of actual franchises that have obtained such results and (3) a cautionary statement

disclosure of sales or earnings projections based on actual data

franchisors must disclose (1) the number and percentage of its actual franchises that have obtained such results and (2) a cautionary statement in at least 12 point boldface type that reads "Caution: Some outlets have sold this amount. There is no assurance you'll do as well. If you rely upon our figures, you must accept the risk of not doing so well"

termination-at-will clauses

generally held to be void on the grounds that they are unconscionable ... the franchisee has spent time, money, and effort developing the franchise, they deserve a just cause; if not, they can sue the franchisor and recover damages

franchisee

(licensee) the party who is granted the franchise and license by a franchisor in a franchise arrangement

franchisor

(licensor) the party who grants the franchise and license to a franchisee in a franchise arrangement

Uniform Franchise Offering Circular (UFOC)

(state disclosure laws) a uniform disclosure document that requires a franchisor to make specific resale disclosures to prospective franchisees (i.e. description of franchisor's business, B/S and I/S, material terms, any restrictions on the franchisee's territory, etc); UFOC satisfies both state regulations and the FTC

joint venture corporation

a corporation owned by two or more joint ventures that is created to operate a joint venture; joint venturers are shareholders of the joint venture corporation; it is liable for its debts and obligations, and the joint venturers are liable for the debts and obligations of the joint venture corporation only up to their capital contributions to the joint venture corporation

trademark and service mark

a distinctive mark, symbol, name, word, motto, and device that identifies the goods or services of a particular franchisor; franchisors license these to their franchisees

area franchise

a franchisor authorizes a franchisee to negotiate and sell franchises on its behalf in designated areas; granted for a certain designated geographical area, such as a state, a region, or another agreed on area; the area franchisee is called a sub-franchisor (i.e. if Starbucks wanted to enter a foreign country to operate its coffee shops)

chain-style franchise

a franchisor licenses a franchisee to make and sell its products or distribute its services to the public from a retail outlet serving an exclusive territory; most fast food franchises use this form (i.e. Pizza Hut)

distributorship franchise

a franchisor manufacturers a product and licenses a franchisee to distribute the product to the public (i.e. Ford manufactures and franchises independently owned automobile dealers (franchisees) to sell them to the public)

processing plant franchise

a franchisor provides a secret formula or process to the franchisee, and the franchisee manufactures the product and distributes it to retail dealers (i.e. Coca-Cola owns formulas, sells syrup to bottling companies, who adds water and sweeteners, and produce and distribute soft drinks under the Coca-Cola name and other brand names)

joint venture partnership

a partnership owed by two or more joint ventures that is formed to operate a joint venture; each joint venturer is liable for the debts and obligations of the joint venture partnership

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; if a franchisor violates FTC disclosure rules, the wrongdoer is subject to an injunction against further franchise sales, civil fines, and an FTC civil action on behalf of injured franchisees

franchise agreement

an agreement that a franchisor and franchisee enter into that sets forth the terms and conditions of a franchise; usually do not have much room for negotiation; most states require franchise agreements to be in writing

strategic alliance

an arrangement between two or more companies whereby they agree to ally themselves and work together to accomplish a designated objective (i.e. many times, companies align when expanding internationally); these alliances do not have the same protection as mergers, joint ventures, or franchising ... consideration must always be given to the fact that a strategic alliance partner is also a potential competitor

joint venture

an arrangement in which two or more business entities combine their resources to pursue a single project or transaction; unless otherwise agreed, joint ventures have equal rights to manage a joint venture ... they owe each other the fiduciary duties of loyalty and care

franchise

an arrangement whereby one party (the franchisor) licenses another party (the franchisee) to use the franchisor's intellectual property and business model in the distribution of goods and services

actual agent

created when a franchisor expressly or implicitly makes a franchisee its agent ... the franchisor is liable for the contracts entered into and torts committed by the franchisee while the franchisee is acting within the scope of the agency; franchisors rarely appoint franchisees as their agents

apparent agency

created when a franchisor leads a third person into believing that the franchisee is its agent (i.e. a franchisor and franchisee who use the same trade name and trademarks and make no effort to inform the public of their separate legal status may find themselves in such a situation) ... however, a franchisor is not liable for the franchisee's actions if they merely use the same name

FTC (Federal Trade Commission) franchise rule

requires franchisors to make full resale disclosures nationwide to prospective franchisees; does not require the registration of the disclosure document with the FTC prior to use

licensee

the party to whom a license is granted

licensor

the party who grants a license