permits one business to use another business’s trademarks, service marks, trade names, and other intellectual property in selling goods and services.
allows two or more businesses to combine their resources to pursue a single project or transaction
used to enter foreign markets
established when one party (franchisor, or licensor) licenses another party (the franchisee, or licensee) 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, franchisor and franchisee are established as separate corporations
4 Basic Forms of Franchises
1) distributorship franchise
2) processing plant franchise
3) chain-style franchise
4) area franchise
franchisor manufactures a product and licenses a retail dealer to distribute a product to the public
ex – ford motor company manufactures automobiles and franchises independently owned automobile dealers (franchisees) to sell them to the public
Processing Plant Franchise
franchisor provides a secret formula or the like to the franchisee. The franchisee then manufactures the product at its own location and distributes it to retail dealers
ex – coca-cola corporation, which owns secret formulas for making Coca-Cola and other soft drinks, licenses regional bottling companies to manufacture and distribute soft drinks under the “Coca-Cola” name and other brand names
franchisor licenses the franchisee to make and sell its products or services to the public from a retail outlet serving an exclusive geographical territory. The product is made or the service provided by the franchise. Most fast-food franchises use this form
ex – pizza hut corporation franchises independently owned restaurant franchises to make and sell pizzas to the public under the “Pizza Hut” name.
franchisor authorizes the franchisee to negotiate and sell franchises on behalf of the franchisor. The area franchisee is called a subfranchisor. An area franchise is granted for a certain designated geographical area, such as state, region, or another agreed-upon area. Area franchises are often used when a franchisor wants to enter a market in another country.
ex – if Starbucks wanted to enter the country of Vietnam to operate its coffee shops, it could grant an area franchise to a Vietnamese company, which would then choose the individual franchisees in that country
Uniform Franchise Offering Circular (UFOC)
a uniform disclosure document that requires a franchisor to make specific presale disclosures to prospective franchisees.
The UFOC and state laws requires a franchisor to make specific presale disclosures to prospective franchisees. Information that must be disclosed includes a description of the franchisor’s business, balance sheets, and income statements of the franchisor for the preceding three years, material terms of the franchise agreement, any restrictions on the franchisee’s territory, reasons permitted for the termination of the franchise, and other relevant information.
FTC Franchise Rule
requires franchisors to make full presale disclosures nationwide to prospective franchisees. FTC does not require the registration of the disclosure document with the FTC prior to its use. The UFOC satisfies both state regulations and the FTC.
Disclosure of Sales or Earnings Projections Based on Actual Data
if a franchisor makes sales or earnings projections for a potential franchise location that are based on the actual sales, income, or profit figures of an existing franchise, the franchisor must disclose the following:
– number and % of its actual franchises that have obtained such results
– cautionary stmt in at least 12-pt boldface type that reads, “Caution: Some outlets have sold (or earned) this amount. There is no assurance you’ll do as well. If you rely upon figures, you must accept the risk of not doing so well”
Disclosure of Sales or Earnings Projections based on Hypothetical Data
if franchisor makes sales or earnings projections based on hypothetical examples, franchisor must disclose:
– assumptions underlying the estimates
-the number and percentage of actual franchises that have obtained such results
-cautionary statement, “Caution: Some outlets have sold (or earned) this amount. There is no assurance you’ll do as well. If you rely upon figures, you must accept the risk of not doing so well”
a statement required by the FTC to appear in at least 12-point boldface type on the cover of a franchisors required disclosure stmt to prospective franchisees.
e.g.- “we haven’t checked it out, and don’t know if it’s correct. Study carefully. Don’t rely on it alone… It may be against law..”
sets forth the T&C’s of the franchise. although some states permit oral franchise agreements, most have enacted statutes of Frauds that requires franchise agreements to be in writing. to prevent unjust enrichment, courts occasionally enforce oral franchise agreements that violate the Statute of Frauds.
A franchise agreement often specifies the total investment that a franchisee must provide in order to be granted the franchise
Topics Covered in a Franchise Agreement
-quality control standards
-covenant not to compete
quality control standards
protect name and reputation, inspections, etc
franchisees usually required to attend training programs
covenant 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. unreasonable covenants not to compete are void
provides that any claim or controversy arising from the franchise agreement or an alleged breach thereof is subject to arbitration. U.S. Supreme Court has held such causes to be enforceable
include restrictions on use of franchisor’s trade name, trademarks, logo, etc
initial license fee
lump-sum payment for privilege of being granted a franchise
fee for the continued use of the franchisor’s trade name, property, and assistance that is often computed as a percentage of the franchisee’s gross sales. royalty fees are usually paid on a monthly basis
fee for such things as advertising and promotional campaigns and administrative costs, billed either as a flat monthly or annual fee or as a percentage of gross sales
payment for any land or equipment leased from the franchisor, billed either as a flat monthly or annual fee or as a percentage of gross sales or other agreed-upon amount
cost of supplies
involves payment for supplies purchased from the franchisor
consulting fees and other expenses
monthly or annual fee for having experts from the franchisor help the franchisee to better conduct business
product formulas, business plans, models, other ideas. ideas that make a franchise successful but that do not qualify for trademark, patent, or copyright protection
misappropriation of a trade secret, holder of the trade secret can sue the offending party for damages and obtain an injunction to prohibit further unauthorized use of the trade secret
liability of franchisor and franchisee
franchisor deals with franchisee as an independent contractor. franchisees are liable on their own contracts and are liable for their own torts (negligence). franchisors are liable for their own contracts and torts. Generally, neither party is liable for the contracts or torts of the other
ex – McDonalds corp grants a restaurant franchise to Tina Corp. Tina Corp opens the franchise restaurant. One day a customer spills a milkshake on the floor. Employees at the franchise fail to clean up the spilled shake, an hour later, another customer slips on the spilled shake and suffers severe injuries. Injured customer can recover damages from the franchisee, Tina Corp, because it was negligent. It cannot recover damages from the franchisor, McDonalds Corp.
ex – suppose that McDonalds Corp, franchisor, grants a franchise to Gion Corp, franchisee. McDonalds enters into a loan agreement with Citibank, it borrows $100M. Gion Corp, franchisee, is not liable on the loan. McDonalds Corp, franchisor and debtor is liable on loan.
created when a franchisor expressly or implicitly makes a franchise its agent. 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 very seldom appoint franchisees as their agents
created when a franchisor leads a third person into believing that the franchisee is its agent. for example, 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, mere the use of the same name does not automatically make a franchisor liable for the franchisee’s actions. the court’s decision of whether an apparent agency has been creaetd depends on the facts and circumstances of the case
most franchise agreements permit a franchisor to terminate the franchise for this.
ex – continued failure of a franchisee to pay franchise fees or meet legitimate quality control stanards would be deemed just cause
unreasonably strict application of a just cause termination clause.
a single failure to meet a quality control standard, for example, is not cause of termination
breach of a franchise agreement
aggrieved party can sue the breaching party for rescission of the agreement, restitution, and damages
when one business or party that owns trademarks, service marks, trade names, and other intellectual property (licensor) contracts to permit another business or party (licensee) to use its trademarks, service marks, trade names, and other intellectual property in the distribution of goods, services, software, and digital information.
ex – walt disney company owns merchandising rights to winnie the pooh stories and all characters associated. disney enters into an agreement whereby it permits the beijing merchandising company, bus under chinese law, to manuf and distribute a line of clothes, toys, and other items bearing likeness of winnie the pooh characters. this is a license
arrangement in which two or more business entites combine their resources to pursue a single project or transaction. resemble partnerships, except that partnerships are usually formed to pursue ongoing business ops rather than to focus on a single project or transaction. joint ventures have equal rights to manage a joint venture. joint venturers owe each other the fiduciary duties and loyalty and care. if a joint venturer violates these duties. it is liable for the damages the breach causes
joint venture partnership
when a joint venture is operated as a partnership.
ex – new oil filed is discovered in northern canada. chevron and conoco would each like to drill for oil but neither has sufficient resources to do it alone. they join together to form a joint venture partnership and contributes $100M each of capital to joint venture. if joint venture fails and owes $1B to creditors, are each responsible for joint venture’s unpaid debts and obligations.
joint venture corporation
joint ventures often form this to operate the joing venture. joint venturers are shareholders of the joint venture corporation. joint venture corporation is liable for its debts and obligations. 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
ex – chevron and conoco form a 3rd corp called canada oil to operate joint venture. chevron and conoco each contribute $100M to canada oil and each becomes a shareholder oc canada oil. if joint venture fails and canaada oil owes $1B to creditors, which it cannot pay, chevron and conoco each loses its $100M capital contribution but is is not liable for any further unpaid debts or obligations of canada oil
arrangement between 2 or more companies in the same industry in which they agree to ally themselves to accomplish a designated objective. a strategic alliance allows the companies to reduce risks, share costs, combine technologies, and extend their markets. for example, companies often enter into strategic alliances when they decide to expand internationally into foreign countries.
strategic alliances do not have the same protection as mergers, joint ventures, or franchising, and sometimes they are dismantled. consideration must always be given to the fact that a strategic alliance partner is also a potential competitor