Deck 40: Franchise and Special Forms of Business

Question 1

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

A) registration of the disclosure document with the FTC before it is used
B) full presale disclosures to prospective franchisees nationwide
C) statement to fully finance the infrastructure necessary to bring the franchisee to the franchisor's standard
D) disclosure of license agreement made with franchisee that lets the franchisee use the franchisor's service mark

Answer 1

B

Question 2

Which of the following is true of a franchise?

A) The franchisor and franchisee are established as separate legal entities.
B) A franchisee does not need a license to use the franchisor's trademark.
C) The franchisee does not have access to the franchisor's knowledge.
D) A franchise is considered a joint venture.

Answer 2

A

Question 3

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 ________.

A) disclosure of earning projections based on actual data
B) disclosure of earning projections based on hypothetical data
C) nondisclosure of sales or earnings projections
D) fraudulent disclosure by the franchisor

Answer 3

B

Question 4

Rio-Werner Corporation owns Rio's Sandwiches, a fast-food restaurant in New Jersey. It wants to operate in five cities on the west coast by means of franchisees which make and sell all menu items from Rio's Sandwiches. Which of the following would best suit Rio-Werner Corporation's franchise plan?

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

Question 5

In a processing plant 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.

Question 6

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

A) display a cautionary statement that warns against misuse of the franchisor's intellectual properties
B) disclose the assumptions underlying the estimates
C) register the disclosure document with the FTC prior to its use
D) state that all data disclosed is only hypothetical and that actual data will be made available at the earliest

Question 7

Explain the four basic types of franchises in brief.

Question 8

Limonelle Corporation owns the secret formula for a popular beverage brand Limonelle. The corporation operates through franchises in over 50 countries. It uses a secret formula to prepare the drink concentrate which is dispatched to the franchises world over. These franchises then prepare and bottle the beverage for distribution. Which of these types of franchises has Limonelle adopted?

A) chain-style franchise
B) processing plant franchise
C) distributorship franchise
D) area franchise

Question 9

A distributorship franchisee is called a subfranchisor.

Question 10

In a(n) ________ franchise, the franchisor manufactures a product and licenses a retail dealer to sell the product to the public.

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

Question 11

In which of the following types of franchise does a franchisor provide a secret formula or process to the franchisee?

A) chain-style franchise
B) area franchise
C) distributorship franchise
D) processing plant franchise

Question 12

In a(n) ________ 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.

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

Question 13

The area franchisee is also called a ________.

A) joint venturer
B) limited partner
C) subfranchisor
D) strategic partner

Question 14

Which of the following federal agencies is empowered to enforce federal franchising rules?

A) the Federal Trade Commission (FTC)
B) the Securities and Exchange Commission (SEC)
C) the Federal Communications Commission (FCC)
D) the Commodity Futures Trading Commission (CFTC)

Question 15

A(n) ________ is established when one party licenses another party to use the first party's trade name, trademarks, commercial symbols, patents, copyrights, and other property in the distribution and selling of goods and services.

A) proprietorship
B) franchise
C) implicit contract
D) general partnership

Question 16

Which of the following is an instance of an area franchise?

A) McDonald's franchises an independently owned restaurant to make and sell its products in Pennsylvania.
B) PepsiCo Inc. ships Pepsi in the form of a drink concentrate which is prepared and bottled locally in Canada.
C) Nokia licenses a retail dealer to retail its products in Jacksonville.
D) Burger King wants to start operating in Mexico and hires a Mexican subfranchisor to sell the franchise on behalf of Burger King.

Question 17

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?

A) contract details of the franchisor and the existing franchises
B) management methods that have been adopted by the existing franchises
C) the number and percentage of its actual franchises that have obtained such results
D) any sales or marketing strategy employed by the franchisor in acquiring such results

Question 18

In a(n) ________ franchise, the franchisor authorizes the franchisee to negotiate and sell franchises on behalf of the franchisor.

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

Question 19

A franchise is established when parties of a general partnership conduct business outside the state of their incorporation.

Question 20

In an area franchise, the franchisor authorizes the franchisee to negotiate and sell franchises on behalf of the franchisor.

Question 21

Trade secrets do not qualify for copyright protection.

Question 22

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

A) The franchisor is not liable for any tort arising out of the franchise.
B) Both franchisee and franchisor are jointly liable for torts committed by either.
C) Franchisees are only liable on their own contracts.
D) Franchisors are always liable for the torts of the franchisees.

Question 23

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

Question 24

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

A) the FTC disclosure document
B) the franchise agreement
C) the articles of incorporation
D) the articles of organization

Question 25

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

A) in the licensing agreement between the franchisor and franchisee
B) as a separate clause in the franchise agreement
C) on the cover of a franchisor's required disclosure statement
D) on the cover of a franchisee's required disclosure statement

Question 26

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 ________.

A) disclosure of earning projections based on actual data
B) disclosure of sales projections based on hypothetical data
C) nondisclosure of sales or earnings projections
D) fraudulent disclosure by the franchisor

Question 27

A franchisor deals with the franchisee as an independent contractor.

Question 28

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?

A) HotPan, for not providing a "Caution: Wet Floor!" sign
B) Ubiquitous Enterprises, for not having its own "Caution" sign
C) Linda, for not alerting Gary
D) Gary, for not noticing that the floor was wet

Question 29

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

A) UFOC
B) UCC
C) UCITA
D) SEA

Question 30

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

Question 31

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

Question 32

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

Question 33

If the product or service offered by a franchisor has not been tested, it should appear on the Federal Trade Commission (FTC) franchise notice.

Question 34

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

A) FTC criminal action on behalf of the franchisee
B) loss of intellectual property to the franchisee
C) suspension of all business operations in the area
D) an injunction against further franchise sales

Question 35

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

Question 36

The Federal Trade Commission (FTC) does not require the registration of the disclosure document with the FTC prior to its use.

Question 37

A franchisor that makes sales or earnings projections based on hypothetical examples need not disclose the assumptions underlying the estimates.

Question 38

The Federal Trade Commission (FTC) franchise rule is a rule that requires franchisors to make full presale disclosures to prospective franchisees.

Question 39

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

A) Trademarks do not qualify for patents.
B) A word or motto that identifies a franchisor does not qualify for trademark protection.
C) A service mark is exclusive to the franchisor and cannot be licensed to franchisees.
D) Trade secrets of a franchisor do not qualify for patent protection.

Question 40

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.

Question 41

The termination-at-will clause allows franchisees to sue a franchisor in case of an unjust termination of franchise.

Question 42

Which of the following is true of a franchise that was terminated-at-will by a franchisor?

A) The franchisee can only recover damages.
B) The franchisor cannot be held liable for a termination-at-will.
C) The franchisee cannot apply for a franchisee again in the same field of business.
D) The franchisee can sue to recover damages and the franchise.

Question 43

An apparent agency is created when a franchisor and franchisee use the same trade name and trademarks but make no effort to inform the public of their separate legal status.

Question 44

A single failure by a franchisee to meet a quality-control standard is sufficient cause for termination.

Question 45

________ is a business arrangement that occurs when the owner of intellectual property contracts to permit another party to use the intellectual property.

A) General partnership
B) Leasing
C) Licensing
D) Joint venturing

Question 46

Which of the following is true of a franchise agreement?

A) A franchise application is not necessary to qualify for entering into a franchise agreement.
B) The Uniform Franchise Offering Circular (UFOC) sets forth the terms and conditions of the franchise agreement.
C) The terms and conditions of the franchise agreement must always be first drawn by the franchisee.
D) A franchisee can only obtain a license to use the franchisor's intellectual property after entering into a franchise agreement.

Question 47

Which of the following types of clauses, in a franchise agreement, provides that any claim or controversy arising from the franchise agreement or an alleged breach thereof will be settled outside the courts?

A) reserve clause
B) arbitration clause
C) integration clause
D) covenant not to compete

Question 48

A(n) ________ is an amount paid by the franchisee to the franchisor 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.

A) royalty fee
B) assessment fee
C) lease fee
D) contingency fee

Question 49

An ________ refers to an agency that arises when a franchisor creates the image that a franchisee is its agent when in fact an actual agency does not exist.

A) apparent agency
B) implicit agency
C) agency by ratification
D) implied agency

Question 50

Unless otherwise stated, the franchisor is liable for the torts of its franchisee.

Question 51

My-Wear Inc. is an apparel retailer based in San Francisco. It operates through a franchise named KL Apparels in Santa Clara. After about six years of operation, My-Wear Inc. cancelled the franchise with KL Apparels without any notification. The franchise period specified in the contract had not expired and the franchisee had met all standards stated by the franchisor. This constitutes a ________.

A) termination at will
B) termination for cause
C) contractual termination
D) suspension by franchisor

Question 52

The franchisor is liable for the contracts entered into and torts committed by the franchisee while the franchisee is acting within the scope of the apparent agency.

Question 53

Most franchise agreements permit a franchisor to terminate the franchise ________.

A) at will
B) after five years of franchising
C) for cause
D) without just cause

Question 54

Apparent agency arises when a franchisee creates the appearance of being a franchisor's agent when in fact an actual agency does not exist.

Question 55

A franchisor is not permitted to terminate a franchise for any reason.

Question 56

Explain the extent of liability of a franchisor and a franchisee with an example.

Question 57

The party who grants a license is known as the ________.

A) licensee
B) licensor
C) grantee
D) grantor

Question 58

Termination-at-will clauses in franchise agreements are generally held to be void.

Question 59

A franchisee subject to wrongful termination can only recover damages, and not the franchise.

Question 60

When is a franchisor allowed to terminate a franchise? Why are termination-at-will clauses generally held to be void?

Question 61

Licensing refers to a business arrangement that occurs when the owner of intellectual property contracts to permit another party to use the intellectual property.

Question 62

The party to whom a license is granted is known as the ________.

A) licensee
B) licensor
C) grantee
D) grantor

Question 63

Which of the following resembles a joint venture?

A) a conglomerate
B) a merged company
C) a franchise
D) a partnership

Question 64

Explain the concept of joint venture as a business arrangement in brief.

Question 65

Joint venturers are permitted to create a corporation that operates the joint venture.

Question 66

YouKnow Inc. is a corporation that creates educational resources. It grants Middlewest Public School the right to exclusively use its online encyclopedias for three years, for a fee. In this arrangement, YouKnow Inc. is the ________.

A) donor
B) trustee
C) grantor
D) licensor

Question 67

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

A) limited partnership
B) license agreement
C) joint venture
D) franchise

Question 68

Which of the following mandatorily requires a license to be operational and legal?

A) a general partnership
B) a conglomerate
C) a joint venture
D) a franchise

Question 69

A franchise is an example of a license.

Question 70

A ________ refers to an arrangement between two or more companies whereby they agree to ally themselves and work together to accomplish a designated objective.

A) limited partnership
B) strategic alliance
C) joint venture
D) franchise

Question 71

Intrepid Creations is a product design institute which provides educational courses in package design. It manages to acquire the right to use simulation software from Marco Software for a payment of $2,000 a year. There is no clause of expiration on this arrangement and the right to access the software is renewed annually. Which of the following kinds of business arrangements does the aforementioned scenario indicate?

A) a licensing arrangement
B) a general partnership
C) a limited partnership
D) a franchise

Question 72

Joint venturers generally have equal rights to manage a joint venture.

Question 73

Joint venturers do not owe each other fiduciary duties of loyalty and care as they are not bound by a contract.

Question 74

A joint venture is generally an implied contract that lasts until a party disassociates at will.

Question 75

Concreate Development requires architects to design its latest venture-a 64-story skyscraper. It makes a business arrangement with Excellent Architecture and acquires four architects on contract for the ongoing project. This is an instance of a ________.

A) licensing arrangement
B) franchise
C) limited partnership
D) joint venture

Question 76

Which of the following is true of a joint venture corporation?

A) The joint venturers are personally liable for debts of the joint venture corporation.
B) Joint venturers do not owe each other fiduciary duties as a venture is a single business transaction.
C) The management rights of joint venturers in a joint venture are divided in ratio of their capital investment.
D) Each joint venture is liable for the debts and obligations of the joint venture.

Question 77

A joint venture is an arrangement in which two or more business entities combine their resources to pursue an ongoing business operation.

Question 78

A joint venturer is not personally liable for the debts and obligations of the joint venture partnership.

Question 79

Which of the following is true of a joint venture?

A) The parties to a joint venture are considered limited partners.
B) Both parties to a joint venture have equal rights to manage the venture.
C) A joint venture is a partnership that lasts for multiple projects.
D) Parties to a joint venture are exempt from fiduciary duties to each other.

Question 80

A joint venture resembles a conglomeration, with a parent company and subsidiaries.