Deck 36: Small Businesses and Franchises

Question 1

Carlos Del Rey decided to open a Mexican fast-food restaurant and signed a franchise contract with a national chain called La Grande Enchilada. The contract required the franchisee to strictly follow the franchisor's operating manual and stated that failure to do so would be grounds for terminating the franchise contract. The manual set forth detailed operating procedures and safety standards, and provided that a La Grande Enchilada representative would inspect the restaurant monthly to ensure compliance. Nine months after Del Rey began operating his restaurant, a spark from the grill ignited an oily towel in the kitchen. No one was injured, but by the time fi refighters were able to put out the fi re, the kitchen had sustained extensive damage. The cook told the fi re department that the towel was "about two feet from the grill" when it caught fi re. This was in compliance with the franchisor's manual that required towels be placed at least one foot from the grills. Nevertheless, the next day La Grande Enchilada notified Del Rey that his franchise would terminate in thirty days for failure to follow the prescribed safety procedures. Using the information presented in the chapter, answer the following questions.
Would a court be likely to rule that La Grande Enchilada had good cause to terminate Del Rey's franchise in this situation? Why or why not?
DEBATE THIS: All franchisors should be required by law to provide a comprehensive estimate of the profi tability of a prospective franchise based on the experiences of their existing franchisees.

Answer 1

Usually the franchise agreement specifies that termination must be for " for cause " and then defines grounds for termination. Cause might include, for instance, the death or disability of the franchisee, insolvency of the franchisee, breach of the franchisee agreement or failure to meet specified sales quotas.
The cause was a towel 'about two feet from the grill' when it caught fire. This was in compliance with the franchisor's manual that required towels be placed at least one foot from the grills.
Here the safety procedures are the centre of the issue which can constitute as breach of the franchisee agreement but the same are in sync with the laid down procedure of the LGE. Thus LGE cannot claim that to be the cause.

Question 2

Sole Proprietorship James Ferguson operates Jim's 11#E Auto Sales in Jonesborough, Tennessee, as a sole proprietorship. In 1999, Consumers Insurance Co. issued a policy to "Jim Ferguson, Jim's 11#E Auto Sales" covering "Owned 'Autos' Only." Auto was defined to include "a land motor vehicle," which was not further explained in the policy. Coverage extended to damage caused by the owner or driver of an underinsured motor vehicle. In 2000, Ferguson bought and titled in his own name a 1976 Harley-Davidson motorcycle, intending to repair and sell the cycle through his dealership. In October 2001, while riding the motorcycle, Ferguson was struck by an auto driven by John Jenkins. Ferguson fi led a suit in a Tennessee state court against Jenkins, who was underinsured with respect to Ferguson's medical bills, and Consumers. The insurer argued, among other things, that because the motorcycle was bought and titled in Ferguson's own name, and he was riding it at the time of the accident, it was his personal vehicle and thus was not covered under the dealership's policy. What is the relationship between a sole proprietor and a sole proprietorship? How might this status affect the court's decision in this case? [Ferguson v. Jenkins, 204 S.W.3d 779 (Tenn.App. 2006)]

Answer 2

The sole proprietor is an unincorporated business with one owner who pays personal income tax on profits from the business. The benefit of sole proprietorship is that proprietor owns the business; he has full control over the business activity and decision making. A sole proprietor when owns a business then it's called sole proprietorship. Hence, sole proprietor and sole proprietorship share close relationship.
In the given case, the insurer is liable to pay for under dealership policy. F was proprietor of J' 11E Auto Sales and he was riding her motorcycle, and met with an accident. Also the policy document says that "Owned Auto's only". Hence, insurance company cannot arguments that motorcycle was bought and titles in F's own name and therefore, it was his personal property. The insurance company is liable to pay in the given case.

Question 3

CASE PROBLEM WITH SAMPLE ANSWER: Franchise Termination.
Walid Elkhatib, a Palestinian Arab, emigrated to the United States in 1971 and became a U.S. citizen. Eight years later, Elkhatib bought a Dunkin' Donuts, Inc., franchise in Bellwood, Illinois. Dunkin' Donuts began offering breakfast sandwiches with bacon, ham, or sausage through its franchises in 1984, but Elkhatib refused to sell these items at his store on the ground that his religion forbade the handling of pork. In 1995, Elkhatib opened a second franchise in Berkeley, Illinois, at which he also refused to sell pork products. The next year, at both locations, Elkhatib began selling meatless sandwiches. In 1998, Elkhatib opened a third franchise in Westchester, Illinois. When he proposed to relocate this franchise, Dunkin' Donuts refused to approve the new location and added that it would not renew any of his franchise agreements because he did not cany the full sandwich line. Elkhatib filed a suit in a federal district court against Dunkin' Donuts and others. The defendants filed a motion for summary judgment. Did Dunkin' Donuts act in good faith in its relationship with Elkhatib? Explain. [ Elkhatib v. Dunkin' Donuts, Inc., 493 F.3d 827 (7th Cir. 2007) ]

Answer 3

Arguably, DD did not act in good faith regarding E's franchise agreements. Good faith and fair dealing means that a franchisor will not discriminate against franchisee's based on demographics like religion.
In this case, DD had allowed E to open the franchises and operate them as he saw fit. Yet, after 20 years of operating his franchises, DD suddenly refused to renew the franchise agreements. Because E's refusal to handle pork was based on a religious reason, the court will look at how DD handled similarly situated franchisees. If the court finds that DD allowed other franchises to not serve the whole sandwich line for reasons other than religion, they will most likely find a violation of good faith. This violation would stem from the fact DD's refusal of renewal based on E's religion.

Question 4

Sole Proprietorship Julie Anne Gaskill is an oral and maxillofacial surgeon in Bowling Green, Kentucky. Her medical practice is a sole proprietorship that consists of Gaskill as the sole surgeon and an office staff. She sees every patient, exercises all professional judgment and skill, and manages the business. When Gaskill and her spouse, John Robbins, initiated divorce proceedings in a Kentucky state court, her accountant estimated the value of the practice at $221,610, excluding goodwill. Robbins's accountant estimated the value at $669,075, including goodwill. (Goodwill is the ability or reputation of a business to draw customers, get them to return, and contribute to future profitability.) How can a sole proprietor's reputation, skill, and relationships with customers be valued? Could these qualities be divided into "personal" and "enterprise" goodwill, with some goodwill associated with the business and some solely due to the personal qualities of the proprietor? If so, what might comprise each type? Is this an effective method for valuing Gaskill's practice? Discuss. [ Gaskill v. Robbins , 282 S.W.3d 306 (Ky. 2009)]

Question 5

Franchise Disclosure Peaberry Coffee, Inc., owned and operated about twenty company stores in the Denver area. The company began a franchise program and prepared a disclosure document as required by the Federal Trade Commission (FTC). Peaberry sold ten franchises, and each franchisee received a disclosure document. Later, when the franchises did not do well, the franchisees sued Peaberry, claiming that its FTC disclosure document had been fraudulent. Specifically, the franchisees claimed that Peaberry had not disclosed that most of the company stores were unprofitable and that its parent company had suffered significant financial losses over the years. In addition, the trial court found that an article in the Denver Business Journal -in which an executive had said that Peaberry was profitable-was fraudulent. This article had been included in the franchisees' information packets. The district court dismissed the franchisees' complaint, noting that the FTC disclosure document had contained an exculpatory clause (see Chapter 13). This clause said that the buyers should notrely on any material that was not in the franchise contract itself. The franchisees appealed. Can a franchisor disclaim the relevance of the information it provides tofranchisees? Why or why not? [Colorado Coffee Bean, LLC v. Peabeny Coffee, Inc., ___ P.3d ___ (Colo.App. 2010)]

Question 6

The Franchise Contract Kubota Tractor Corp. makes farm, industrial, and outdoor equipment. Its franchise contracts allow Kubota to enter into dealership agreements with "others at any location." Kejzar Motors, Inc., is a Kubota dealer in Nacogdoches and Jasper, Texas. These two Kejzar stores operate as one dealership with two locations. Kubota granted a dealership to Michael Hammer in Lufkin, Texas, which lies between Kejzar's two store locations. Kejzar filed a suit in a Texas state court against Kubota. Kejzar asked for an injunction to prevent Kubota from locating a dealership in the same market area. Kejzar argued that the new location would cause it to suffer a significant loss of profits. Which party in a franchise relationship typically determines the territory served by a franchisee? Which legal principles come into play in this area? How do these concepts most likely apply in this case? Discuss. [Kejzar Motors, Inc. v. Kubota Tractor Corp., 334 S.W.3d 351 (Tex.App.-Tyler 2011)]

Question 7

A QUESTION OF ETHICS: Sole Proprietorship.
In August 2004, Ralph Vilardo contacted Travel Center, Inc., in Cincinnati, Ohio, to buy a trip to Florida in December for his family to celebrate his fiftieth wedding anniversary. Vilardo paid $6,900 to David Sheets, the sole proprietor of Travel Center. Vilardo also paid $195 to Sheets for a separate trip to Florida in February 2005. Sheets assured Vilardo that everything was set, but in fact no arrangements were made. Later, two unauthorized charges for travel services totaling $1,182.35 appeared on Vilardo's credit-card statement. Vilardo pled a suit in an Ohio state court, against Sheets and his business, alleging, among other things, fraud and violations of the stale consumer protection law. Vilardo served Sheets and Travel Center with copies of the complaint, the summons, a request for admissions, and other documents filed with the court, including a motion for summary judgment. Each of these filings asked for a response within a certain time period. Sheets responded once on his own behalf with a denial of all of Vilardo's claims. Travel Center did not respond. [ Vilardo v. Sheets, ___ Ohio App.3d ___ (2006)]
(a) Almost four months after Vilardo filed his complaint, Sheets decided that he was unable to adequately represent himself and retained an attorney, who asked the court for more time. Should the court grant this request? Why or why not? Ultimately, what should the court rule?
(b) Sheets admitted that Travel Center, Inc., was a sole proprietorship. He also argued that liability might be imposed on his business but not on himself. How would you rule with respect to this argument? Why. Would there be anything unethical about allowing Sheets to avoid liability on this basis? Explain.

Question 8

Franchising Maria, Pablo, and Vicky are recent college graduates who would like to go into business for themselves. They are considering purchasing a franchise. If they enter into a franchising arrangement, they would have the support of a large company that could answer any questions they might have. Also, a firm that has been in business for many years would be experienced in dealing with some of the problems that novice businesspersons might encounter. These and other attributes of franchises can lessen some of the risks of the marketplace. What other aspects of franchising-positive and negative-should Maria, Pablo, and Vicky consider before committingthemselves to a particular franchise?

Question 9

Carlos Del Rey decided to open a Mexican fast-food restaurant and signed a franchise contract with a national chain called La Grande Enchilada. The contract required the franchisee to strictly follow the franchisor's operating manual and stated that failure to do so would be grounds for terminating the franchise contract. The manual set forth detailed operating procedures and safety standards, and provided that a La Grande Enchilada representative would inspect the restaurant monthly to ensure compliance. Nine months after Del Rey began operating his restaurant, a spark from the grill ignited an oily towel in the kitchen. No one was injured, but by the time fi refighters were able to put out the fi re, the kitchen had sustained extensive damage. The cook told the fi re department that the towel was "about two feet from the grill" when it caught fi re. This was in compliance with the franchisor's manual that required towels be placed at least one foot from the grills. Nevertheless, the next day La Grande Enchilada notified Del Rey that his franchise would terminate in thirty days for failure to follow the prescribed safety procedures. Using the information presented in the chapter, answer the following questions.
What type of franchise was Del Rey's La Grande Enchilada restaurant?
DEBATE THIS: All franchisors should be required by law to provide a comprehensive estimate of the profi tability of a prospective franchise based on the experiences of their existing franchisees.

Question 10

QUESTION WITH SAMPLE ANSWER: Control of a Franchise.
National Foods, Inc., sells franchises to its fast food restaurants, known as Chicky-D's. Under the franchise agreement, franchisees agree to hire and train employees strictly according to Chicky-D's standards. Chicky-D's regional supervisor are required to approve all job candidates before they are hired and all general policies affecting those employees. Chicky-D's reserves the right to terminate a franchise for violating the franchisor's rules. In practice, however, Chicky-D's regional supervisors routinely approve new employees and individual franchisees' policies. After several incidents of racist comments and conduct by Tim, a recently hired assistant manager at a Chicky-D's, Sharon, a counterperson at the restaurant, resigns. Sharon files a suit in a federal district court against National. National files a motion for summary judgment, arguing that it is not liable for harassment by franchise employees. Will the court grant National's motion? Why or why not?

Question 11

Carlos Del Rey decided to open a Mexican fast-food restaurant and signed a franchise contract with a national chain called La Grande Enchilada. The contract required the franchisee to strictly follow the franchisor's operating manual and stated that failure to do so would be grounds for terminating the franchise contract. The manual set forth detailed operating procedures and safety standards, and provided that a La Grande Enchilada representative would inspect the restaurant monthly to ensure compliance. Nine months after Del Rey began operating his restaurant, a spark from the grill ignited an oily towel in the kitchen. No one was injured, but by the time fi refighters were able to put out the fi re, the kitchen had sustained extensive damage. The cook told the fi re department that the towel was "about two feet from the grill" when it caught fi re. This was in compliance with the franchisor's manual that required towels be placed at least one foot from the grills. Nevertheless, the next day La Grande Enchilada notified Del Rey that his franchise would terminate in thirty days for failure to follow the prescribed safety procedures. Using the information presented in the chapter, answer the following questions.
If Del Rey operates the restaurant as a sole proprietorship, then who bears the loss for the damaged kitchen? Explain.
DEBATE THIS: All franchisors should be required by law to provide a comprehensive estimate of the profi tability of a prospective franchise based on the experiences of their existing franchisees.

Question 12

The Franchise Contract Otmar has secured a high-quality ice cream franchise. The franchise agreement calls for Otmar to sell the ice cream only at a specific location; to buy all the ice cream from the franchisor; to order and sell all the flavors produced by the franchisor; and to refrain from selling any ice cream stored for more than two weeks after delivery by the franchisor, as the quality of the ice cream declines after that period of time. After two months of operation, Otmar believes that he can increase his profits by moving the store to another part of the city. He refuses to order even a limited quantity of the "fruit delight" flavor because of its higher cost, and he has sold ice cream that has been stored longer than two weeks without customer complaint. Otmar maintains that the franchisor has no right to restrict him in these practices. Discuss his claims.

Question 13

Carlos Del Rey decided to open a Mexican fast-food restaurant and signed a franchise contract with a national chain called La Grande Enchilada. The contract required the franchisee to strictly follow the franchisor's operating manual and stated that failure to do so would be grounds for terminating the franchise contract. The manual set forth detailed operating procedures and safety standards, and provided that a La Grande Enchilada representative would inspect the restaurant monthly to ensure compliance. Nine months after Del Rey began operating his restaurant, a spark from the grill ignited an oily towel in the kitchen. No one was injured, but by the time fi refighters were able to put out the fi re, the kitchen had sustained extensive damage. The cook told the fi re department that the towel was "about two feet from the grill" when it caught fi re. This was in compliance with the franchisor's manual that required towels be placed at least one foot from the grills. Nevertheless, the next day La Grande Enchilada notified Del Rey that his franchise would terminate in thirty days for failure to follow the prescribed safety procedures. Using the information presented in the chapter, answer the following questions.
Assume that Del Rey fi les a lawsuit against La Grande Enchilada, claiming that his franchise was wrongfully terminated. What is the main factor that a court would consider in determining whether the franchise was wrongfully terminated?
DEBATE THIS: All franchisors should be required by law to provide a comprehensive estimate of the profi tability of a prospective franchise based on the experiences of their existing franchisees.

Question 14

The Franchise Contract On August 23, 1995, Climaco Guzman entered into a commercial janitorial services franchise agreement with Jan-Pro Cleaning Systems, Inc., in Rhode Island for a franchise fee of $3,285. In the agreement, Jan-Pro promised to furnish Guzman with "one (1) or more customer account(s) … amounting to $8,000.00 gross volume per year. … No portion of the franchise fee is refundable except and to the extent that the Franchisor, within 120 business days following the date of execution of the Franchise Agreement, fails to provide accounts." By February 19, Guzman had not received any accounts and demanded a full refund. Jan-Pro then promised "two accounts grossing $12,000 per year in income." Despite its assurances, Jan-Pro did not have the ability to furnish accounts that met the requirements. In September, Guzman filed a suit in a Rhode Island state court against Jan-Pro, alleging, in part, fraudulent misrepresentation. Should the court rule in Guzman's favor? Why or why not? [Guzman v. Jan-Pro Cleaning Systems, Inc., 839 A.2d 504 (R.I. 2003)]