Question 1

A franchisor discloses a cautionary statement that reads,"Caution: Some outlets have sold this amount.There is no assurance you'll do as well.If you rely upon our figures,you must accept the risk of not doing so well." This is an instance of ________.

Accepted Answer

This statement is an example of disclosure of earning projections based on actual data, where the franchisor is providing information about past sales outcomes of some outlets while also cautioning that these results are not guaranteed for future franchisees.

Question 2

Which of the following is true of intellectual property of a franchisor?

Accepted Answer

Trade secrets of a franchisor may be protected under intellectual property law, but they do not qualify for patent protection. Patents protect inventions or discoveries, while trade secrets typically refer to confidential information or processes that give a business a competitive advantage.

Question 3

What are the steps a prospective franchisee must take in order to acquire a franchise? What properties are generally licensed by franchisors?

Accepted Answer

The answer of What are the steps a prospective franchisee...

Question 4

Where should the Federal Trade Commission (FTC)franchise notice appear?

Accepted Answer

The FTC franchise notice is required to appear on the cover of the franchisor's required disclosure statement. This ensures that potential franchisees are aware of their rights and the regulations they are entitled to under the FTC's Franchise Rule.

Question 5

The Uniform Franchise Offering Circular (UFOC)satisfies only the Federal Trade Commission (FTC)and a separate disclosure document should be prepared by the franchisor in accordance with state regulations.

Accepted Answer

The Uniform Franchise Offering Circular (UFOC) was replaced by the Franchise Disclosure Document (FDD) in 2007, which satisfies both federal and state regulations. Therefore, there is no need for a separate disclosure document to be prepared by the franchisor in accordance with state regulations.

Question 6

If a franchisor makes sales or earnings projections based on hypothetical examples,the franchisor must ________.

Accepted Answer

The franchisor must disclose the assumptions underlying the estimates if they make sales or earnings projections based on hypothetical examples. This is to provide transparency and prevent misleading franchisees.

Question 7

Which of the following is true of the liabilities of a franchisor and a franchisee?

Accepted Answer

Franchisees are only liable on their own contracts, while the franchisor is not automatically liable for torts committed by the franchisees. However, if the franchisor exercises substantial control over a franchisee's operations or gives direct instructions to the franchisee, the franchisor may be held liable for the franchisee's torts under the theory of vicarious liability.

Question 8

Trade secrets do not qualify for copyright protection.

Accepted Answer

Trade secrets and copyrights are two separate forms of intellectual property protection. Trade secrets are protected through confidentiality agreements and other legal measures, while copyrights protect original works of authorship that are fixed in a tangible form. Therefore, trade secrets do not qualify for copyright protection.

Question 9

A franchisor deals with the franchisee as an independent contractor.

Accepted Answer

A franchisor typically does not have direct control over day-to-day operations of the franchisee, but provides support and guidance for the franchisee to operate their business effectively. Therefore, the franchisee is considered an independent contractor.

Question 10

Explain the four basic types of franchises in brief.

Accepted Answer

The answer of Explain the four basic types of franchises...

Question 11

The ________ is a uniform disclosure document that requires a franchisor to make specific presale disclosures to prospective franchisees.

Accepted Answer

The Uniform Franchise Offering Circular (UFOC) is a uniform disclosure document that requires a franchisor to make specific presale disclosures to prospective franchisees.

Question 12

Ubiquitous Enterprises is a franchisee of HotPan chain of restaurants.One afternoon,Linda,an employee of a HotPan restaurant owned by the franchisee,is mopping the floor.Gary,a customer who enters the restaurant is talking on his cell phone and does not notice Linda mopping the floor.He slips on the wet floor while walking to the counter and is injured.Who among the following is liable for Gary's injuries?

Accepted Answer

As a franchisee, Ubiquitous Enterprises is responsible for maintaining the safety standards in their own branch. They should have their own "Caution" sign to warn customers about wet floors. HotPan may also be held liable if they have failed to provide adequate training and guidelines to the franchisee regarding safety measures. However, Linda may not be held liable as it is not her responsibility to alert each and every customer about the wet floor. It is the responsibility of the establishment to ensure that proper precautions are taken to prevent such accidents. Gary may also not be held liable as it is reasonable for him to expect that the establishment is reasonably safe to walk in.

Question 13

In a franchise agreement,by default,the franchisor and franchisee are separate legal entities.

Accepted Answer

Franchisor and franchisee are separate legal entities by default in a franchise agreement, which means they have independent legal personalities and can be sued or enter into contracts independently.

Question 14

Franchisors are not permitted to disclose trade secrets and product formulas to franchisees.

Accepted Answer

Franchisors are allowed to disclose trade secrets and product formulas to franchisees in order for them to successfully run the franchise. However, they may require the franchisee to sign a non-disclosure agreement to protect the confidential information.

Question 15

Which of the following data must a franchisor disclose if the 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?

Accepted Answer

The franchisor must disclose the number and percentage of actual franchises that have obtained the projected results in order to provide a reasonable basis for the projections. This information is important for potential franchisees to determine the accuracy and validity of the projections. The other options do not directly relate to the disclosure of sales or earnings projections based on actual results of existing franchises.

Question 16

A royalty fee is an amount paid by the franchisor to the franchisee for the continuous use of its trademarks and maintenance of quality.

Accepted Answer

A royalty fee is an amount paid by the franchisee to the franchisor for the continuous use of its trademarks and maintenance of quality.

Question 17

Which of the following does the Federal Trade Commission (FTC)franchise rule require from franchisors?

Accepted Answer

The FTC franchise rule mandates that franchisors provide full presale disclosures to prospective franchisees, ensuring they have all the necessary information to make an informed decision before entering into a franchise agreement.

Question 18

Which of the following documents sets forth the terms and conditions of a franchise?

Accepted Answer

The franchise agreement is the document that sets forth the terms and conditions of a franchise, including the rights and obligations of the franchisor and franchisee. The FTC disclosure document provides information about the franchisor, but it does not contain contractual terms. The articles of incorporation and articles of organization relate to the formation of a corporation or LLC, respectively, but do not pertain to franchise agreements.

Question 19

A franchisor discloses a cautionary statement that reads,"Caution: These figures are only estimates of what we think you may earn.There is no assurance you'll do as well.If you rely upon our figures,you must accept the risk of not doing so well." This is an instance of ________.

Accepted Answer

The cautionary statement suggests that the earning projections are based on hypothetical data and not actual data. Additionally, it warns that there is no assurance that the franchisee will earn as much, and accepting the risk of not doing so well is essential. Therefore, this is an instance of disclosure of earning projections based on hypothetical data.

Question 20

Which of the following is imposed upon a franchisor that violates the Federal Trade Commission (FTC)franchise disclosure rule?

Accepted Answer

Violation of the FTC franchise disclosure rule can result in an injunction against further franchise sales. This means that the franchisor would be prohibited from selling any additional franchises until they come into compliance with the rule. Criminal action is not typically taken by the FTC in these cases. Loss of intellectual property or suspension of business operations would be extreme measures and are not included in the standard penalties for violating the franchise disclosure rule.

Quiz 40: Franchises and Special Forms of Businesses