Deck 5: The Franchisor-Franchisee Relationship

Question 1

A potential franchisee misled by an incorrect disclosure document may file suit for recovery under the FTC's Franchise Disclosure Rule.

Answer 1

False

Question 2

Frank Franchisee owns and operates a free-standing donut franchise. The franchisor granted Frank an exclusive donut territory. Things went well and Frank soon had more dough pun intended) than he knew what to do with. However, the donut franchisor decided to expand its reach and offered new franchises on the outskirts of Frank's territory. Frank comes to you for advice about encroachment. What is encroachment? How do you determine if the franchisor has encroached on Frank Franchisee?

Answer 2

Encroachment is defined as expansion by the franchisor beyond the point that the franchisor would have expanded had it owned all its own outlets. It occurs when franchisor sells a franchisee an outlet in a particular location, then sells another outlet in close vicinity to a different franchisee, or opens its own location.
Generally, the contractual language of the franchise agreement will determine whether impermissible encroachment has occurred. If, under the terms of the agreement, the franchisee received an exclusive territory, the franchisor is clearly prohibited from locating other units within that territory.
Many cases involve a middle ground, where the franchisor locates new units near enough to the protected territory to have a negative impact on the original franchisee. In cases where the contract language is not clear, the implied covenant of good faith will control the court's decision. The covenant of good faith imposes upon each party a duty of good faith and fair dealing. Where explicit language is lacking, the court has to determine if the franchisor's actions violated this duty. In this case, the court would have to look at the actual contract language and make a determination if the company violated the terms of the agreement or the implied covenant of good faith.

Question 3

What is co-branding?

A) Shared marketing between the franchisor and franchisee.
B) The operation of two or more franchised businesses at the same location.
C) Marketing the same product under two brand names.
D) Using franchisees to promote a brand name in addition to that of the brand name of the main product.

Answer 3

B

Question 4

If a customer is hurt at a franchisee's parking lot because of inadequate lighting, is the franchisor liable?

A) Yes, if the franchisor exercised control over the lighting.
B) No, because franchisees are responsible for the physical building and surrounding areas.
C) Yes, because the customer can recover from the "deep pockets" of the franchisor.

Question 5

East Sanitation Services hired Jon in 1995 as a salesperson for specified routes. In 1999, East started a franchise program and Jon signed a 25-page document. As a franchisee, Jon performed substantially the same services that he had as an employee. East would like to fire Jon, but is unsure of the consequences. What factors determine if East can fire Jon?

Question 6

As part of its franchise agreement, the Floral Delivery Company FDC) requires its franchisees to sell standard floral arrangements, in designs set forth in FDC catalogues, at prices set by FDC. FDC has discovered that Monica's Floral Delights, a FDC franchisee, is selling bouquets for prices below that approved by FDC, and is thus undercutting nearby franchisees and harming their business. This is a form of encroachment, and FDC may enforce the minimum pricing provisions provided they are set forth clearly in the franchise agreement.

Question 7

Fast-food restaurants are an example of what type of franchise?

A) Business format franchise.
B) Uniform business franchise.
C) Product and trade name franchise.
D) "Cookie cutter" franchise.

Question 8

Cookie Surprise! is a national company that markets cookie "bouquets" as an alternative to traditional floral bouquets for festive occasions such as birthdays or baby or wedding showers. Cookie Surprise! sells its system to small bakery owners who then, in addition to selling their normal bakery wares, also offer cookie bouquets. Under the contractual arrangement, Cookie Surprise! supplies the necessary specialty equipment for making and decorating the cookie bouquets, provides periodic instructions for making new bouquet designs, and offers marketing and advertising tips to the bakeries. The system is popular with local bakeries because it is set up so that Cookie Surprise!'s involvement in the relationship is never apparent to the end consumer and in fact, the end consumer is likely to think that the cookie bouquets originate with and are unique to the local bakery with which they are dealing. In return, the bakeries agree to adhere to certain quality standards, to avoid making any bouquets of a lewd or risqué character, and to pay a flat monthly fee of $50 for a minimum of one year, plus a royalty fee based on cookie bouquets sold.

Question 9

It has become increasingly common for plaintiffs to sue the franchisor for negligence arising from injuries suffered on the franchisee's premises. What factors must a plaintiff show to recover from a franchisor under a negligence theory?

Question 10

Although the FTC Franchise Disclosure Rule requires a regulated franchisor to prepare a disclosure and file it with the FTC, the FTC does not review or approve the disclosure.

Question 11

Explain why it is important from the franchisee's perspective that the franchisor-franchisee relationship be clear.