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Franchise Law

Franchise Law. Statistics: 35-40% of retail sales occurs through franchises 600,000 franchised locations. Distributorship Product and trade name franchise Manufacturing/processing plant arrangement. Chain-style operations Business Format Franchise. Types of Franchises.

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Franchise Law

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  1. Franchise Law

  2. Statistics: • 35-40% of retail sales occurs through franchises • 600,000 franchised locations Distributorship Product and trade name franchise Manufacturing/processing plant arrangement Chain-style operations Business Format Franchise Types of Franchises

  3. Presentation Case: Miller v. McDonald’s – Vicarious Liability of FranchisorGroups 12 & 17

  4. Presentation Case: To-Am Equipment Co (P). v. Mitsubishi Caterpillar Forklift America (D) , (7th Cir 1998), p. 175.Groups 18 & 15

  5. Stewart’s Soda End-of-Chapter Q: 12 Facts: Existing beverage distributor took on new line of soda – “Stewarts” • Stewarts later wants to cancel contract • Issue. Is this contract subject to franchise law? Definition of Franchise • Contract. A franchise is a contract between two or more persons which: • Sell Franchisor’s Product or System. A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services, under a marketing plan or system prescribed or suggested in substantial part by a franchisor; and • Franchisor’s Trademark. The operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate; and • Franchise Fee >$500. The person granted the right to engage in such business is required to pay, directly or indirectly, a franchise fee of $500 or more. • Federal Franchise Disclosure – similar, adds assistance to or control over franchisee’s business, usually through the provision of a marketing plan or system. • Ford Dealership and Auto-by-Tel • Facts: Auto-by-Tel operates an internet site which refers potential customers to auto dealers • JDI, a ford dealership entered into a 5 year contract with Auto-by-Tel to be the exclusive Ford dealer in four-county area • Either party could terminate with 30 days notice • Auto-by-Tel gave notice of termination to JDI • Issue. JDI claimed the contract was a franchise and that Auto-by-Tel could not terminate without good cause • Analysis. JDI largest Ford dealership in metro Detroit • JDI did not use Auto-by-Tel name and did not use a marketing plan of Auto-by-Tel • JDI did pay a fee of $3,500 plus $500 per month – this would be considered a franchise fee Start here last day

  6. Vicarious Liability Theories of liability • Negligence Theory. Franchisor was negligent • Duty of care owed • Breach of that duty • Causation • Damages • Agency Theory. • Franchisee was an actual agent of the franchisor • The franchisee was an apparent agent of the franchisor Dunkin Donuts case illustrations on page 164 • Facts: Dunkin Donuts franchised a store to Turnway Donuts, inc. • Turnway hired Wendy Hong Wu to work at the Dunkin Donuts • Early one morning when Wu was working alone two teenagers entered the store and brutally attached and raped Wu. • Issue. Is Dunkin Donuts, the Franchisor, vicariously liable because it provided the franchisee security procedures? • Analysis. • Did the franchisor exercise a considerable degree of control? • She argued that franchisor required the franchise to stay open 24 hours, it controlled the purchase of security equipment, and required a site plan that reveled to a passerby that Wu was alone. • Held: Dunkin Donuts not liable because it lacked the degree of control over the franchisee

  7. Actual or Apparent Agency case illustrations on page 166 Motel 6 Apparent Agency Liability for Sexual Harassment • Facts: Abby Fogt and Mary Carter worked at Motel 6 managed by Lisa Serafini • Fogt and Carter said they were sexually harassed, assault and abused by Serafini • Fogt and Carter informed the franchisor and the franchisor said he would tell the owner of the franchise • He did, but did not follow up • Issue. Did the franchisor exercise the degree of control required to acquire apparent agency responsibility • Analysis. Motel 6 franchisor said it will not tolerate discrimination of any kind • Stated that franchisee is solely responsible for this – not franchisor • Plaintiffs knew that Motel 6 did not own the hotel • Held: No actual or apparent authority absent the franchisor’s statement that he would talk to the franchise owner about it. He may have been negligent in not doing more follow up – remanded back to trial court to determine if franchisor is negligent in breaching duty of care to follow up on the issue.

  8. What Does a Franchisor Provide a Franchisee? What Does Franchisor Control? • Business Location. Restrictions on business location or sales territory; or customers • Business Advice. Furnishing management, marketing or personnel advice; • Training Programs. Formal sales, repair, or business training programs; • Operations Manual. Furnishing a detailed operations manual; • Promotional Campaign. Promotional campaigns requiring participation or financial contribution; • Mandatory Personnel Policies. Mandatory personnel policies and practices; • Product Techniques. Control over production techniques; • Appearance Requirements. Location design or appearance requirements; or ; • Hours of Operation. Control over hours of operation.

  9. Regulation of the Franchise Relationship • Disclosure under FTC Franchise Disclosure Rule • History of the franchisor, • Required fees and investment costs • Information about the franchisor, • Financial statements about the franchisor • Litigation and bankruptcy history • Copy of franchisor standard franchise agreement • No Filing Required – No Review by Federal Government • Penalties • FTC may seek injunction, civil penalties, and consumer redress • The rule does not allow a private cause of action

  10. State Disclosure Rules • Disclosure Law. Fifteen states require franchisors to provide disclosures • Uniform Franchise Offering Circular. This will satisfy both state and federal law. • Registration Law. MN requires a registration as well as a filing • Business Opportunity Statutes. Somewhat different than franchise because do not use seller’s trademark. • Private Party Lawsuits. State laws permit private parties to sue for damages

  11. Presentation Case: Island Silver & Spice (P) v. Islamorada (D) (11th Cir 2008), p. 173.Groups 10 & 19 Start here thurs

  12. When Does a Franchise Relationship Exist – case illustrations on page 163 West Sanitation • Facts: West Sanitation provides restroom sanitizing services to commercial customers • West Sanitation hired Glenroy Francis in 1986 as a service person for certain routes • West Sanitation implemented a franchise program in 1987 and Francis become a franchisee • West terminated Francis’s franchise for cause in 1992 • Francis applied for unemployment insurance – employee entitled to unemployment – franchisees are not. • Issue. Is Francis an employee or franchisee? • Analysis. West exercised a significant amount of control over Francis. • West retained billing • West established weekly schedules • West evaluated Francis’s performance • Held: West liable for unemployment compensation. Francis is an employee.

  13. Encroachment Burger King End-of-Chapter Q: 6 Facts: Weaver operated two Burger King restaurants: both in Great Falls, one leased from BK and he owned the other building • No territorial rights granted – i.e. no exclusive territory • BK opened its own restaurant in Great Falls upsetting Weaver • Weaver stopped paying rent, royalties and other money due BK • Issue. Did BK violate implied covenant of good faith by opening another store? Burger King End-of-Chapter Q: 1, p. 184 Facts: Employees of Conoco claimed discrimination based on race. Issue. Is Franchisor liable?

  14. Internet Franchise Issues • DrugEmporium.com

  15. Termination Issues • Good cause – to terminate or renew • Notice requirements 90-180 days • Flat or declining sales • Termination of entire product line Airborne Freight End-of-Chapter Q: 7 Facts: • Airborne Fright Corp entered into a contract with East Wind Express under which East Wind agreed to provide delivery services for Airborne in northern Oregon. • Airborne covered all customer contact and billing and called East Winds to pick up and deliver items. • East Wind used Airborne uniforms and logos on trucks and this was paid for through an advertising fee allotment from Airborne • Airborne terminated relationship • Issue. • Was this an independent contractor relationship that allows for liberal termination or was this a franchise which is more restrictive as to termination? • What are the termination rules for franchises?

  16. Presentation Case– Queen City Pizza v. Domino’s Pizza, Groups 20 & 13

  17. Shell Oil v. A.Z. End-of-Chapter Q: 4 • Facts: A.Z. Services leased a service station from Shell for 5 years. • It also entered into a Dealer Agreement where A.Z. would sell Shell gas. • A.Z. stopped selling Shell gas and started selling Skipper’s Choice, a Shell competitor • Shell terminated the lease and tried to kick out A.Z. • Issue. A.Z. sued Shell for an unlawful tying arrangement – tying the Shell Dealer Agreement (unwanted item) with the lease (desired item). Franchise Antitrust Issues • Relevant Market (Domino’s Case) • Tying arrangements • Vertical price restraints • Co-branding • Cold Stone and Original Soup Man • Encroachment • Termination issues • Multi-level marketing Original Soup Man

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