PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 5th Edition by Henry R.

Cheeseman

Chapter 30 Franchises, Licensing, and Strategic Alliances

Slides developed by Les Wiletzky Wiletzky and Associates

Copyright 2006 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 franchisors 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 franchisors 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
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 (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 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 (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 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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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

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 Commissions (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 franchisors 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

franchisors 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 franchisees 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 franchisees 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

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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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
It 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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