Question 1

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

Accepted Answer

The FTC Franchise Disclosure Rule does not provide for private causes of action by disappointed franchisees.

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?

Accepted Answer

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?

Accepted Answer

Co-branding refers to the collaboration where two or more brands operate together, often at the same location, to leverage each other's strengths and customer bases.

Question 4

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

Accepted Answer

The franchisor could be liable if they exercised control over the parking lot's lighting, indicating their involvement in the maintenance or operational standards that could affect safety.

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?

Accepted Answer

The answer of East Sanitation Services hired Jon in 1995...

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.

Accepted Answer

This is not “encroachment”; moreover, minimum price restraints are illegal per se because of the negative effect upon consumers, and so may not be enforced by franchisors, regardless of the terms of the franchise agreement.

Question 7

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

Accepted Answer

Business format franchises, like fast-food restaurants, offer a full business model including the brand, operational procedures, marketing, and products or services to sell.

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.

Accepted Answer

There is no use of trademark or logo of the franchisor by the franchisee here, which is a key definition of a franchise under the Illinois Act and most other state laws as well.

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?

Accepted Answer

The answer of It has become increasingly common for plaintiffs...

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.

Accepted Answer

There is no requirement or ability) to file disclosure documents with the FTC.

Question 11

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

Accepted Answer

The answer of Explain why it is important from the...

Quiz 5: The Franchisor-Franchisee Relationship