Deck 31: Franchise and Special Forms of Business

Question 1

In a "chain-link" franchise,the franchisor licenses the franchisee to make and sell its products or services to the public from a retail outlet serving an exclusive geographical territory.

Answer 1

False

Question 2

The Federal Trade Commission "franchise rule" requires franchisors to make full pre-sale disclosure nationwide to prospective franchisees.

Answer 2

True

Question 3

In a processing plant franchise,the franchisor provides a secret formula or the like to the franchisee; the franchisee then manufactures the product at its own location and distributes it to retail dealers.

Answer 3

True

Question 4

A franchisee and franchisor are usually established as the same corporation.

Question 5

Under the Federal Trade Commission "franchise rule," a franchisor may make sales projections for a potential franchisee based on sales of an existing franchise,but not on sales of a hypothetical franchise.

Question 6

An "area" franchise grants the franchisee the authority to sell franchises on behalf of the franchisor.

Question 7

The term franchise refers to both the agreement between the parties and the franchise outlet.

Question 8

A franchise is established when one party,the franchisor,licenses another party,the franchisee,to use the franchisor's trade name,trademarks,commercial symbols,patents,copyrights,and other property in the distribution and selling of goods and services.

Question 9

There are four (4)basic forms of franchises: (1)trusteeship franchise; (2)manufacturing plant franchise; (3)"chain-link" franchise; and (4)geographical franchise.

Question 10

The "FTC franchise rule" requires that the disclosure document be registered with the FTC prior to its publication or distribution to prospective franchisees.

Question 11

An "area" franchise licenses the franchisee to make and sell its products to the public from a retail outlet serving an exclusive geographical territory.

Question 12

Although some states permit oral franchise agreements,most have enacted Statutes of Frauds that require franchise agreements to be in writing.

Question 13

Franchise agreements do not usually have much room for negotiation.

Question 14

Under Federal Trade Commission rules,franchisors are required to make sales projections related to hypothetical franchisees.

Question 15

To prevent unjust enrichment,courts occasionally enforce oral franchise agreements that violate the Statute of Frauds.

Question 16

Franchises may be granted to sell and distribute products,but not to perform services.

Question 17

The Federal Trade Commission requires the registration of the disclosure document prior to its use.

Question 18

A franchise arrangement is typically used in a situation where there is no trademark or other intellectual property owned by the franchisor.

Question 19

A "distributorship" franchise is used when the franchisor manufactures a product and licenses a retail dealer to distribute the product to the public.

Question 20

The Federal Trade Commission requires that a "FTC notice" be placed on the cover of a franchisor's required disclosure statement to prospective franchisees,providing certain information for the protection of franchisees.

Question 21

McDonald's does not grant exclusive geographical territories to its franchisees.

Question 22

If a franchise is properly organized and operated,the franchisor and franchisee are separate legal entities.

Question 23

If a franchisee is the actual or apparent agent of the franchisor,the franchisor is responsible for the torts and contracts the franchisee committed or entered into within the scope of the agency.

Question 24

A franchise agreement usually contains a license that grants the franchisee the right to use certain intellectual property that is owned by the franchisor.

Question 25

The misappropriation of a franchisor's trade secret is called unfair competition.

Question 26

Franchise agreements normally require fees to be paid by the franchisee to the franchisor before the start of the franchisee's operations,but not after the business is underway.

Question 27

An assessment fee is a franchise fee for such things as advertising and promotional campaigns and administrative costs.

Question 28

Royalty fees for the continued use of the franchisor's trade name,property,and assistance are usually paid on an annual basis.

Question 29

The franchisor typically deals with the franchisee as an independent contractor.

Question 30

Assessment fees are typically billed as a flat monthly or annual fee,or as a percentage of gross sales.

Question 31

Most franchise agreements contain an arbitration clause,which provides that any claim or controversy arising from the franchise agreement is subject to arbitration.

Question 32

Covenants not to compete prohibit franchisees from competing with the franchisor during a specific time and in a specified area after the termination of the franchise.

Question 33

A franchisor's ability to maintain the public's perception of the quality of the goods and services associated with its trade name,trademarks,and service marks is the essence of its success.

Question 34

Anyone who uses a franchisor's mark without authorization may be sued for negligence.

Question 35

Franchise agreements commonly set forth training requirements.

Question 36

Generally,neither the franchisor nor the franchisee is liable for the contracts or torts of the other.

Question 37

A royalty fee is a fee for the continued use of the franchisor's trade name,property,and assistance that is often computed as a percentage of the franchisee's gross sales.

Question 38

A franchise agreement is usually written so that most issues can be negotiated,allowing the parties to either come to a satisfying agreement from the start,or to renegotiate the terms and conditions of the contract during the business relationship between the franchisor and the franchisee .

Question 39

An initial license fee is a periodic payment for the privilege of being granted a franchise.

Question 40

Over-extensive covenants not to compete are nevertheless enforceable if they are included in franchise agreements.

Question 41

A franchisor and franchisee who use the same trade name and trademarks and make no effort to inform the public of their separate legal status may find themselves in an "apparent agency" situation.

Question 42

If a franchise is terminated without just cause,the franchisee can sue the franchisor for wrongful termination.

Question 43

Generally,a single failure to meet a quality control standard is not cause for termination of a franchise.

Question 44

Joint ventures are never an available option for international expansion because of the complexities involved in transacting international business.

Question 45

Most franchise agreements permit a franchisor to terminate the franchise for cause.

Question 46

Termination-at-will clauses in franchise agreements are generally enforceable.

Question 47

Unreasonably strict application of a just cause termination clause in a franchise agreement constitutes wrongful termination.

Question 48

The parties participating in a joint venture owe each other a fiduciary duty of loyalty.

Question 49

A joint venture may be formed as a partnership,or as a corporation.

Question 50

Business owners considering a strategic alliance should not be concerned that a strategic alliance partner is a potential competitor,because that would breach the duty of loyalty.

Question 51

A strategic alliance is an arrangement between two or more companies in the same industry in which they agree to ally themselves to accomplish a designated objective.

Question 52

The parties participating in a joint venture have the right to engage in the management of the joint venture,based upon the amount of their capital contributions.

Question 53

Licensing occurs when one business or party that owns intellectual property,the licensee,contracts to permit another business or party,the licensor,to use its intellectual property in the distribution of goods,services,software,and digital information.

Question 54

A joint venture is an arrangement in which two or more business entities combine their resources to pursue a single project or transaction.

Question 55

Joint ventures resemble partnerships in that they are both usually formed to pursue ongoing business operations.

Question 56

Express agency is created when a franchisor leads a third person into believing that the franchisee is its agent.

Question 57

Licensing is an important business arrangement in both domestic and international markets.

Question 58

Parties enter into licensing agreements through contracts.

Question 59

Mere use of the same name does not automatically make a franchisor liable for the franchisee's actions.

Question 60

A licensee is a party who allows another party to use a trademark.

Question 61

In which type of franchise does the franchisor provide a "secret formula" to the franchisee?

A) distributorship
B) processing plant
C) re-servicing
D) chain-style
E) area

Question 62

Strategic alliances are often used by companies to enter a foreign market.

Question 63

What type of information need not be disclosed in a Uniform Franchise Offering Circular?

A) a description of the franchisor's business
B) balance sheets of the franchisor for the preceding three (3) years
C) income statements of the franchisor for the preceding three (3) years
D) non-material terms of the franchise agreement
E) any restrictions on the franchisee's territory

Question 64

Which of the following best describes a franchise?

A) two parties work together on a limited-duration project or enterprise
B) a business establishes numerous retail locations, owned by the business, that all offer similar products or services
C) a retailer pays a fee to operate a business using a particular name under a standardized general business plan, with the fee often being paid in the form of royalties
D) a seller of products is in business long enough for its trade name to become widely-recognized
E) a business obtains the right from another business to operate with limited liability

Question 65

Which of the following is not an advantage of franchising?

A) The franchisor can reach new markets.
B) In the typical franchise relationship, the franchisor will cover some of the losses of the franchisee in its first few years of operation.
C) The franchisee has access to the franchisor's knowledge and resources.
D) Consumers are assured of uniform product quality.
E) The franchisee operates an independent business.

Question 66

In which type of franchise does the franchisee grant franchises or licenses to others?

A) distributorship
B) processing plant
C) re-servicing
D) chain-style
E) area

Question 67

The franchise ________ often includes detailed information about the prospective franchisee's previous employment,financial and educational history,and credit status.

A) disclosure statement
B) memorandum of understanding
C) application
D) agreement
E) articles of organization

Question 68

Franchises can be used for which types of businesses?

A) services
B) goods
C) goods and/or services
D) goods and services, but only for services if the services are connected with a particular good
E) services and goods, but only for goods if a "secret formula" is connected with a particular good

Question 69

In which type of franchise does the franchisor license the franchisee to make and sell its products or services to the public from a retail outlet serving an exclusive geographical territory?

A) distributorship
B) processing plant
C) re-servicing
D) chain-style
E) area

Question 70

Franchise law is:

A) state law.
B) federal law.
C) federal and state law.
D) state common law.
E) federal common law.

Question 71

Which of the following statements best describes the government's regulation of franchisor activities in seeking franchisees?

A) There is very little regulation and oversight of these activities.
B) There are very few regulations directed specifically at franchisors, because other regulations address potential problems in this area.
C) These activities are heavily regulated, with laws at both the state and federal levels.
D) These activities are heavily regulated, but only at the state level, because most franchising activities cross state lines.
E) These activities are heavily regulated, but only at the federal level, because of concerns with uniformity.

Question 72

The Uniform Franchise ________ requires a franchisor to make specific presale disclosures to prospective franchisees.

A) Memorandum
B) Offering Circular
C) Disclosure Statement
D) Memorandum of Understanding
E) Acceptance Statement

Question 73

The federal agency that covers franchises and enforces franchise law at the federal level is the:

A) Interstate Commerce Commission.
B) Justice Department.
C) Federal Trade Commission.
D) Patent and Trademark Office.
E) Federal Franchise Commission.

Question 74

A business arrangement where one party licenses another party to use its trade name,trademarks,commercial symbols,patents,copyrights,and other property in the distribution and selling of goods and services is known as a:

A) joint venture.
B) proprietorship.
C) franchise.
D) partnership.
E) limited liability company.

Question 75

The rule requiring franchisors to make full presale disclosures to prospective franchisees is called the:

A) interstate franchise rule.
B) Federal Trade Commission franchise rule.
C) federal disclosure rule.
D) justice disclosure rule.
E) intrastate franchise rule.

Question 76

Which of the following is not one of the basic forms of a franchise?

A) area
B) chain-style
C) processing plant
D) joint venture
E) distributorship

Question 77

A strategic alliance allows participating companies to reduce risks,share costs,combine technologies,and extend their markets.

Question 78

Which of the following is not typically covered in a franchise agreement?

A) territory
B) licensing of intellectual property
C) required payments
D) quality control standards
E) confidential business plans

Question 79

Over ________ franchise outlets in the United States account for over ________ percent of retail sales and about ________ percent of the nation's gross domestic product.

A) 250,000; 15; 10
B) 500,000; 20; 10
C) 700,000; 25; 15
D) 1,000,000; 30; 20
E) 1,500,000; 35; 25

Question 80

Strategic alliances have the same protection as mergers,joint ventures,or franchising.