PowerPoint Slides to Accompany
CONTEMPORARY BUSINESS AND
ONLINE COMMERCE LAW
6th Edition
by Henry R. Cheeseman
Chapter 31
Franchises and Special Forms
of Business
Copyright © 2009 by Pearson 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 (1 of 4)
Distributorship Franchise
 The franchisor manufactures a product and licenses
a retail franchisee to distribute the product to the
public.
 i.e., the Ford Motor Company manufactures
automobiles and franchises independently owned
dealers to sell them to the public
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Types of Franchises (2 of 4)
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.
 i.e., 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 (3 of 4)
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.
 i.e., 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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Types of Franchises (4 of 4)
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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Example of an Area Franchise
Franchisor
Area
Franchise
Subfranchisor
Franchise
Franchisee
Franchise
Franchisee
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Franchise
Franchisee
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State Disclosure Laws
 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.
 i.e., 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 “For Cause”
 A franchisor can terminate a franchise
agreement for “just cause.”
i.e., nonpayment of franchise fees by the
franchisee
 i.e., continued failure to meet quality control
standards

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Termination at Will
 Prevents a franchisor from taking
advantage of the good will developed at
the franchise location by the franchisee.
 Most state and federal laws regarding
franchising prohibit franchisors from
terminating the franchises at will.
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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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Licensing
 An arrangement where a party that owns
trademarks and other intellectual property
(the licensor) contracts to permit another
party (the licensee) to use these
trademarks and intellectual property in the
distribution of goods, services, software,
and digital information.
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Parties to a Typical Licensing
Agreement
Licensor
Grant of permission to use
trademarks, service marks,
trade names, and other
intellectual property
Licensee
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Joint Venture
 An arrangement whereby two or more
business entities combine their resources
to pursue a single project or transaction.
 Joint Venturer – a party to a joint venture.
 Joint venturers owe each other duty of
fiduciary duty and loyalty.
 If a joint venturer violates this duty, it is
liable for the damages the breach causes.
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Strategic Alliance (1 of 2)
 An arrangement between two or more
companies in the same industry whereby
they agree to ally themselves to
accomplish a designated objective
 Allows the companies to reduce risks,
share costs, combine technologies, and
extend their markets
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Strategic Alliance (2 of 2)
 Strategic alliances do not have the same
protection as mergers, joint ventures, or
franchising, and are sometimes
dismantled.
 Consideration must always be given to the
fact that a strategic alliance partner is also
a potential competitor.
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