PowerPoint Slides to Accompany
BUSINESS LAW
E-Commerce and Digital Law
International Law and Ethics
5th Edition
by Henry R. Cheeseman
Chapter 39
Franchises and Licensing
Slides developed by
Les Wiletzky
Wiletzky and Associates, Puyallup, WA
Copyright © 2004 by Prentice-Hall. All rights reserved.
Franchising is an important method of
distributing goods and services to the
public.
In the United States, franchising
accounts for over 25 percent of retail
sales and 15 percent of gross domestic
product (GDP).
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Franchise
Established when one party licenses another
party to use the franchisor’s trade name,
trademarks, commercial symbols, patents,
copyrights, and other property in the
distribution and selling of goods and services.
 Generally, the franchisor and the franchisee
are established as separate corporations.

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Advantages to Franchising
1. The franchisor can reach lucrative new
markets.
2. The franchisee has access to the
franchisor’s knowledge and resources while
running an independent business.
3. Consumers are assured of uniform product
quality.
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Parties to a Typical Franchise Agreement
Franchisor
(Licensor)
Grant of franchise and
license to use trademarks,
service marks, and trade
secrets
Franchisee
(Licensee)
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Types of Franchises
Distributorship Franchise
 The franchisor manufactures a product and licenses a
retail franchisee to distribute the product to the public.

e.g., the Ford Motor Company manufactures
automobiles and franchises independently owned
dealers to sell them to the public.
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Types of Franchises (continued)
Processing Plant Franchise
 The franchisor provides a secret formula or process to
the franchisee.
 The franchisee manufactures the product and distributes
it to retail dealers.
 e.g., the Coca-Cola Corporation licenses regional
bottling companies to manufacture and distribute soft
drinks under the “Coca-Cola” and other brand names.
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Types of Franchises (continued)
Chain-Style Franchise
 The franchisor licenses the franchisee to make and sell
its products or distribute services to the public from a
retail outlet serving an exclusive territory.
 Most fast-food franchises use this form.
 e.g., the Pizza Hut Corporation franchises independently
owned restaurant franchises to make and sell pizzas to
the public under the “Pizza Hut” name.
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39 - 8
Types of Franchises (continued)
Area Franchise
 The franchisor grants the franchisee a franchise for an
agreed-upon geographical area.
 The franchise may determine where to locate the outlets
in the designated area.
 An area 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.
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39 - 9
Example of an Area Franchise
Franchisor
Area
Franchise
Subfranchisor
Franchise
Franchisee
Franchise
Franchisee
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Franchise
Franchisee
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Disclosure Protection

Many states have enacted statutes that
require franchisors to make specific presale
disclosures to prospective franchisee.

Some states use a uniform disclosure
statement called the Uniform Franchise
Offering Circular (UFOC).
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Federal Trade Commission’s (FTC) Rule
The FTC requires franchisors to make presale
disclosures to prospective franchisees.
 The franchisor must disclose assumptions
underlying any estimates and hypothetical
data.
 The franchisor must provide a mandated
precautionary statement.

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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

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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
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Breach of the Franchise Agreement
A lawful franchise agreement is an enforceable
contract.
 Each party owes a duty to adhere to and
perform under the terms of the franchise
agreement.
 If the agreement is breached, the aggrieved
party can sue the breaching party for rescission
of the agreement, restitution, and damages.

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Trademarks
A franchisor licenses the use of its trademarks
and service marks to its franchisees 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.

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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.

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Contract and Tort Liability
Franchisors and franchisees are liable for
their own contracts.
 Franchisors and franchisees are liable for
their own tort liability.
 e.g., if a person is injured by a franchisee’s
negligence, the franchisee is liable.

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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.

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Actual Agency

An arrangement that occurs where a
franchisor expressly or implicitly by its conduct
makes a franchisee its agent.

The franchisor is liable for the contracts
entered into and torts committed by the
franchisee while acting within the scope of its
agency.
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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.
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Termination of Franchises
Termination “For Cause”
Termination At Will
Wrongful Termination
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Termination “For Cause”

A franchisor can terminate a franchise
agreement for “just cause.”
e.g., nonpayment of franchise fees by the
franchisee
 e.g., continued failure to meet quality control
standards

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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.
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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.

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