Chapter 5 The Law of Business
Organizations
Sole proprietorship
Partnerships
Corporation
Franchise
…
1
What is an Entrepreneur?
A person who forms and operates
a new business either by himself or
herself or with others.
2
What is an Business Organization?
The legal structure under which the
business is conducted is often referred to
as a business organization.
3
Forms of Conducting Business
Sole proprietorship
Partnership
Corporation
Franchise
Joint venture.
…
4
Franchises
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.
5
Franchisor
The party who does the licensing in a
franchise arrangement. Also called the
_______.
6
Franchisee
The party who is licensed by the ______
in a franchise arrangement. Also called
the _______.
7
Types of Franchises (1)
Distributorship franchise:
The franchisor manufactures a product
and licenses a retail franchisee to
distribute the product to the public.
8
Types of Franchises (2)
Processing plant franchise:
The franchisor provides a secret formula
or process to the franchisee, and the
franchisee manufactures the product and
distributes it to retail dealers.
9
Types of Franchises (3)
Chain-style franchise:
The franchisor licenses the franchisee to
make and sell its products or distribute
its services to the public from a retail
outlet serving an exclusive territory.
10
Types of Franchises (4)
Area franchise:
The franchisor authorizes the franchisee
to negotiate and sell franchises on behalf
of the franchisor in designated areas. The
area franchisee is called a subfranchisor.
11
The Franchise Agreement
An agreement that the franchisor and
franchisee enter into that sets forth the
terms and conditions of the franchise (e.
g., quality control standards, covenantsnot–to –compete, etc).
12
Franchise Fees
 Initial license fee




Royalty fee
Assessment fee
Lease fees
Cost of supplies
13
Trademarks
 Trademarks and service marks. A distinctive mark,
symbol, name, word, motto, or device that
identifies the goods or services of a particular
franchisor.
 Licensing of marks. A franchisor licenses the use
of its trademarks and service marks to its
franchisees in the franchise agreement.
 Trademark infringement. 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
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the mark.
Misappropriation of Trade Secrets
1. Trade secrets. Ideas, formulas, and methods
of doing business that make a franchise
successful but do not qualify for trademark,
patent, or copyright protection.
2. 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.
15
Contract and Tort Liability (1)
Franchisors and franchisees are liable for
their own contracts and torts.
The same is true of tort liability
16
Martin
v.
McDonald’s
Corporation
17
CASE
BRIFING
1. McDonald’s is a franchisor that licenses franchisees to
operate fast-food restaurants and to use McDonald’s
trademarks and service marks. One such franchise, which
was located in Oak Forest, Illinois, was owned and operated
by McDonald’s Restaurants of Illinois, the
franchisee. …McDonald’s established an entire corporate
division to deal with security problems at franchises.
McDonald’s prepared a manual for restaurant security
operations and required its franchises to adhere to these
procedures.
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CASE
BRIFING
2. Jim Carson … regional security manager for the area in
which the Oak Forest franchise was located. …visited the
Oak forest franchise on 31 Oct, 1979 to inform… of
security procedures… specifically mentioned these rules:
1) no one should throw garbage out the backdoor after
dark. And 2) trash and grease were to be taken out the side
glass door at least one hour prior to closing. During his
inspection, Jim noted that the locks had to be changed at
the restaurant and an alarm system needed to be installed
for the back door. Jim never followed up to determine19
whether these security measures had been taken.
CASE
BRIFING
3. On the evening of Nov 29, 1979, 6 women, all teenagers,
was working to clean up and close the Oak Forest
restaurant, Martin, Dudek, and Kincaid … A person
later identified as Logan appeared at the back of the
restaurant with a gun, ordering the crew to open the safe
and get him the money … Logan shot and killed Martin,
assaulted Dudek and Kincaid. Dudek and Kincaid
suffered severe emotional distress from the assault.
20
CASE
BRIFING
4. Evidence showed Logan had entered the restaurant
through the backdoor. Trial testimony proved that the
work crew used the backdoor exclusively, both before and
after dark, and emptied garbage and grease through the
backdoor all day and all night. there was evidence that the
latch on the backdoor did not work properly. …that the
crew had not been instructed about the use of the
backdoor after dark and had never received copies of
McDonald’s security manual, and that the required
warning about not using the backdoor after dark had21not
Is McDonald’s liable for
negligence?
22
McDonald’s had voluntarily assumed a duty to the crew
at the Oak Forest franchise by establishing and requiring
the franchisee to implement certain security measures
and by obligating itself to inspect the restaurant to see
that the required security measures were implemented.
McDonald’s was liable for its own negligence due to the
failure of security measures and the failure of its
employee, Jim Carson, to follow up to determine that the
security deficiencies at the Oak Forest franchise had been
corrected. There was ample evidence for the jury to
determine that McDonald’s had breached its assumed
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duty to the plaintiffs.
Decision
The appellate court held
that McDonald’s was
negligent for not following
up and making sure that
the security deficiencies it
had found at the Oak
Forest franchise had been
corrected. Affirmed.
24
Contemporary
Business
What is the benefit to a franchisor to
establish and require its franchisees to
adhere to security rules? Is there any
potential detriment? Explain.
25
Contract and Tort Liability (2)
Independent contractor:
A separately organized and operated business
that is not the agent of another party with
whom it does business. This is the typical
franchisor-franchisee arrangement. There is no
agency relationship, so neither party is liable
for the other’s contracts or torts.
26
Cislaw
v.
Southland
Corp.
27
CASE
BRIFING
1. Southland owns the“7-Eleven” trademark and
licenses franchisees to operate convenience stores
using this trademark. Each franchise is
independently owned and operated. The franchise
agreement stipulates that the franchisee is an
independent contractor who is authorized to make
all inventory, employment and operational decisions
for the franchise.
28
2. Cislaw, 17 years old, died of respiratory呼吸
failure on May 10, 1984. His parents filed a wrongful
death action against the franchise and Southland,
alleging that Timothy’s death resulted from his
consumption of clove丁香 cigarettes sold at a Costa
Mesa, Californian, 7-Eleven franchise store. The
Costa Mesa 7-Eleven was franchised to Charles
Trujillo and Patricia Colwell-Trujillo.
29
CASE
BRIFING
3. After answering the complaint, Southland moved
for summary judgment, arguing that it was not liable
for the alleged tortious conduct of its franchisee
because the franchisee was an independent
contractor. The plaintiffs alleged that the franchisee
was Southland’s agent, and therefore Southland was
liable for its agent’s alleged negligence of selling the
clove cigarettes to their son. The trial court granted
Southland’s motion. The Cislaws appealed.
30
Was the Costa Mesa franchisee
an agent of Southland?
31
The franchisor-franchisee arrangement does not
create a principal-agent relationship unless the
franchisor has the right to exercise substantial
control over the operations of the franchisee. The
franchise agreement gave Southland the right to
establish the hours of operation of its franchises,
to protect its “7-Eleven” trademark from misuse
by the franchisee, and to set cleanliness and
quality control standards at its franchises,
32
but the agreement did not give Southland the
right to control the day-to-day operations of its
Costa Mesea franchise. The court found that
because the franchisee made all inventory,
employment, and day-to-day operational
decisions, it was an independent contractor.
33
Decision
The court of appeals held
that the Costa Mesa 7Eleven franchise was not
an agent of Southland, but
was an independent
contractor. Affirmed.
34
Contemporary
Business
1. Should franchisors be automatically held
liable for the tortious conduct of their
franchisees? Why or why not ?
2. How careful must a franchisor be to retain
enough control to protect the quality of the
goods and services sold by its franchisees,
but not to retain too much control so as to
become liable for the actions of its
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franchisees?
Contract and Tort Liability (3)
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 the agency.
36
Contract and Tort Liability (4)
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.
37
Holiday Inns, Inc.
v.
Schelburne
38
CASE
BRIFING
1.Holiday inns licensed Hospitality Venture to operate a
franchised hotel in Fort Pierce, Florida. The Rodeo Bar,
which had a reputation as the “hottest bar in town”,
was located in the hotel. The Fort Pierce Holiday Inn
and Rodeo Bar did not have sufficient parking, so
security guards posted in the Holiday Inn parking lot
required Rodeo Bar patrons to park in vacant lots that
surrounded the hotel but that were not owned by the
hotel. The main duty of the guards was to keep the
parking lot open for hotel guests.
39
2. Two unarmed security guards were on duty on
the night in question. One guard was drinking on
the job, and the other was an untrained
temporary fill-in. The record disclosed that
although the Rodeo Bar had a capacity of 240
people, the bar regularly admitted 270 to 300
people with 50 to 75 people waiting outside. Fights
occurred all the time in the bar and the parking
lots, and often there were three or four fights a
night. Police reports involving 58 offenses,
including several weapons charges and battery
and assault charges, had been filed during the
previous 18 months.
40
3.On the night in question, the two groups involved
in the altercation/quarreling did not leave the
Rodeo Bar until closing time. According to the
record, these individuals exchanged remarks as
they moved toward their respective vehicles in the
vacant parking lots adjacent to the Holiday Inn.
Ultimately, a fight erupted. The evidence shows that
during the course of physical combat, Mr. Carter
shot David Rice, Scott Turner, and Robert
Shelburne. Rice died from his injuries.
41
4. Rice’s heirs, Turner, and Shelburne sued the
franchisee, Hospitality Venture and the franchisor,
Holiday Inns, for damages. The trial court found
Hospitality Venture negligent for not providing
sufficient security to prevent the foreseeable incident
that took the life of Rice, and injured Turner and
Shelburne. …Hospitality Venture was the apparent
agent of Holiday Inns, and therefore Holiday Inns
was vicariously liable for its franchisee’s tortious
conduct. Turner was awarded $3,825,000 for his
injuries, Shelburne received $1 million, and Rice’s
interests were awarded $1 million. Hospitality
Venture and Holiday Inns appealed.
42
Are the franchisee and the
franchisor liable?
43
A franchisee is always liable for its own tortious
conduct. A franchisor may be held liable for the
tortious conduct of a franchisee if the franchisee
is the “apparent agent” of the franchisor. This
“apparent agent’ occurs when the franchisor
misleads the public into believing that the
franchise is really owned and operated by the
franchisor, even though it is not.
44
Here, the court held that Holiday Inn led the
public into believing that its franchisees were
part of Holiday Inn’s system and not
independently owned businesses. The court held
that Holiday Inn’s reservation system, as well as
the signs at the Fort Pierce franchise hotel, gave
this appearance to the public. Therefore, Holiday
Inns is vicariously liable for the tortious conduct
of its franchisee.
45
The court of appeals held that
franchisee was negligent, and
that the franchisee was the
apparent agent of the franchisor.
Affirmed.
46
Contemporary
Business
What does the doctrine of apparent
agency provide? How does it differ
from actual agency?
47
Termination of Franchises (1)
Termination “for cause,”
Most franchise agreements, and state and
federal laws, permit a franchisor to terminate
the franchise “for cause” (e.g., nonpayment of
franchise fees by the franchisee, continued
failure of the franchisee to meet quality control
standards).
48
Wrongful Termination
Termination at will:
Most laws regulating franchising prohibit
franchisors from terminating franchises at
will. This is to prevent a franchisor from
taking advantage of the good will developed
at the franchise location by the franchisee.
49
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.
50
Conducting International Business
Joint Venture
Branch office
Subsidiary
51
Joint Venture
A voluntary association of two or
more parties (natural persons,
partnerships, corporations, or
other legal entities) to conduct a
single or isolated project with a
limited duration.
52
Branch Office
A branch is a larger unit of the
parent company that involves not
only the placement of individuals
in a particular locale but also the
establishment of a facility, such
as an assembly plant, mining
operation, or service office.
53
Subsidiary
A subsidiary is an
independently organized and
incorporated company.
54