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Franchises: Outline for game

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PostPosted: Thu Apr 03, 2014 9:14 pm    Post subject: Franchises: Outline for game Reply with quote

Caveat: This download is based on my personal notes for the presentation of Franchises. It is provided for my students personal use and is not intended for distribution to others. It is protected by all applicable federal laws. As, until now, it’s been for my personal use it does contain grammatical errors and some spelling mistakes. I have not corrected all of these errors. SW



A party licenses another to use franchisor's trade name, trademarks, commercial symbols, patents, copyrights, and other property in distribution/selling goods and services. Party who's licensed by the franchisor is called franchisee.

Generally: Franchisor and Franchisee established as separate corporations.

TERM FRANCHISE refers to both agreement between parties and franchise outlet.

Advantages: Allows reaching lucrative new markets//giving franchisee access to franchisor's knowledge and resources while running independent business, and assuring consumers uniform product quality.



Franchisor manufacturers product-licenses retail dealer to distribute product to public. E.G.: Ford Motor Company manufactures auto, franchises independently owned auto dealers (franchisees) to sell to public.


Franchisor provides secret formula to franchisee who manufactures product at own location and distributes to retail dealers. E.G.: Coca-Cola Corporation, owns secret formulas licenses regional bottling companies manufacture and distribute under the "Coca-Cola".


Franchisor licenses franchisee make/sell its product/services to public from retail outlet serving exclusive geographical territory. Most fast-food franchises. E.G.: Pizza Hut Corp. franchises independently owned restaurant franchises make and sell pizzas to public under "Pizza Hut" name.


Franchisor authorizes franchisee to negotiate/sell franchises on behalf of franchisor. Granted for certain designated geographical area, such as a state, a region, or another agreed-upon area.


Federal Trade Commission (FTC) enforces federal franchising rules. To prevent prior practice: franchisors made material misrepresentations/omissions to potential franchisees concerning financial future of franchises. (FTC) and many states enacted laws promote full disclosure.


Requires franchisor make specific presale disclosures.


Prior to 1970s, franchising not highly regulated either state or federal. In 1971, California enacted Franchise Investment Law, requiring franchisors register and deliver disclosure documents to prospective franchisees.


1979, Federal Franchise Rule became law. The FTC Rule requires full presale disclosure nationwide to prospective franchisees.

Violaters subject to injunction against further franchise sales, civil fines up to $10K/violation, and FTC civil action on behalf of injured franchisees to recover damages from franchisor caused by violation.

Following statement needs to appear in at least 12-point boldface type on cover of franchisor's required disclosure statement: To protect you, we've required your franchisor to give you this information. We haven't checked it, and don't know if it's correct. It should help you make up your mind. Study it carefully. While it includes some information about your contract, don't rely on it alone to understand your contract. Read all of your contract carefully. Buying a franchise is a complicated investment. Take your time to decide. If possible, show your contract and this information to an adviser, like a lawyer or an accountant. If you find anything you think may be wrong or anything important that's been left out, you should let us know about it. It may be against the law. There may also be laws on franchising in your state. Ask your state agencies about them.


Franchisors often make sales and earnings projections to try to entice prospective franchise, to prevent fraud, FTC adopted rules require certain disclosures if franchisor makes sales or earnings projections based on actual or hypothetical figures. If the franchisor uses the actual sales, income, and profit figures of existing franchise to base such projection on, the franchisor must disclose the following:

The number and percentage of its actual franchises that have obtained such results; and a

E.G. Cautionary statement at least 12-point boldface type "Caution: Some outlets have sold (or earned) this amount. No assurance you'll do as well. If you rely upon our figures, you must accept the risk of not doing so well."

If the franchisor uses hypothetical examples, franchisor must disclose: Assumptions underlying the estimates Number and percentage of actual franchises that have obtained such results. A cautionary statement in at least 12-point boldface print that reads,

OR: "Caution: These figures only estimates of what we think you may earn. No assurance you'll do as well. If you rely upon our figures, you must accept the risk of not doing so well."


SEE 40.4 P. 686 My Pie CASE


A prospective franchisee must apply to franchisor for franchise. Application often includes detailed information about applicant's previous employment, financial, and educational history, credit status, and so on. If approved, parties enter into franchise agreement sets forth terms and conditions. Some states permit oral franchise agreements, most enacted SOF requires writing. To prevent unjust enrichment, Courts occasionally enforce oral franchise agreements that violate SOF.

Common Terms of a Franchise Agreement

Usually not much room for negotiation. Generally, agreement standard form contract prepared by franchisor.

Cover following topics:


Franchisor's most important assets: name and reputation. Right to make periodic inspections of premises and operations. Failure meet proper standards can result in loss of franchise


Franchisees and personnel usually required attend training programs either on-site or at franchisor's training facilities


Prohibit franchisee competing w/franchisor during specific time and in specified area after termination of franchise. Unreasonable (overextensive) covenants-not-to-compete are void.


SEE 40.2 P. 686 THE H&R Block CASE



Any claim/controversy arising from franchise agreement or alleged breach subject to arbitration. U.S. Supreme Court has upheld.


Public expects uniformity, if one sells products/services of lesser quality, reflects on entire franchise. Therefore should set exacting quality control standards in agreement.

Other terms and conditions. Capital requirements; restrictions of use of trade name, trademarks, and logo; standards of operation; duration; record-keeping requirements; sign requirements; hours of operation; prohibition of sale/assignment; conditions for termination; etc.


Usually stipulated in franchise agreement. Franchisor may require franchisee pay any/all of following fees:

Initial license fee.

Lump-sum payment for privilege of being granted franchise

Royalty fee for continued use of franchisor's trade name, property, and assistance often computed as percentage gross sales

Assessment fee for such things as advertising/promotional campaigns, administrative costs, etc. Billed: either flat monthly/annual fee or percentage of gross sales

Lease fees. Payment for any land/equipment leased. billed as either a flat monthly or annual fee or as a percentage of gross sales or other agreed-upon amount

Cost of supplies. Payment for supplies purchased


Lawful franchise agreement enforceable contract. Breached: aggrieved party can sue breaching party for rescission, restitution, and damages.


Agreements detailed documents carefully drafted spell out rights/duties of parties. Franchisee must be careful read/ understand terms. Late '50s, Mattus developed "super premium" ice cream named it "Haagen-Dazs" give product Scandinavian flair. Mattus began selling prepackaged pints to small stores and delis in NY metro area. During '70s, sales expanded into some grocery stores and other retail outlets. '76, Reuben's daughter, Doris Mattus-Hurley, opened first "Haagen-Dazs Shoppe", Brooklyn Heights, NY. Shop prospered, Mattus-Hurley began franchising shops to independent franchisees throughout country. Haagen-Dazs manufactured, distributed, and franchised through variety of corporate entities (collectively referred to as Haagen-Dazs). Franchise agreement, same since '78, grants limited license to franchisee to operate single shop under Haagen-Dazs trademark at specific location; specified term ranging 5-12 yrs. Franchisee agrees purchase all its ice cream from franchisor; prices set by Haagen-Dazs. In '83, Pillsbury, diversified international food and restaurant company headquartered in Minneapolis, Minnesota, purchased Haagen-Dazs company, including franchise operations. Franchise agreements assigned to Pillsbury part of sale. Pillsbury decided could maximize sales by expanding sales through distribution not involving franchisees. Substantially increased sales to national grocery store chains, convenience stores like 7-Eleven; other retail outlets. Severely harmed sales at existing franchises. Franchisees located in many states sued Pillsbury, alleging breached franchise agreement by distributing through non-franchised outlets not "upscale" and by mass distribution of prepackaged pints competed w/franchise outlet sales.

District court: Express terms of franchise agreement not violated. Expressly reserved right of franchisor to distribute Haagen-Dazs products "through not only Haagen-Dazs Shoppes, but any other distribution method, which may from time to time be established." This language gave Pillsbury right aggressively distribute prepackaged pints of Haagen-Dazs through nonfranchise outlets, even though distribution adversely affected retail sales by franchisees.


Franchisor's ability maintain public's perception of quality of goods/services associated w/its trade name, trademarks, and service marks essence of its success. Size of the advertising budgets of many franchisors support this view.

SEE 40.9 P. 687-8 KFC CASE

Lanham Trademark Act, enacted 1946, provides: Registration of trademarks and service marks w/Federal Patent and Trademark Office in Washington, D.C. Most franchisors license use of their trade names, trademarks, and service marks and prohibit franchisees from misusing.

Trademarks and Online Commerce

Businesses often develop company names, as well as advertising slogans and commercial logos, to promote sale of their goods and services. Companies such as Nike, Microsoft, Louis Vuitton, and McDonald's spend millions to gain market recognition from consumers. Congress: Trademark laws to provide legal protection for these names, slogans, and logos.


Federal protection to trademarks, service marks, and other marks, as amended: to (1) protect owner's investment and goodwill; and (2) prevent consumers from being confused as to origin of goods and services.

Trademark registered w/U.S. PTO in Washington, DC. The original registration valid for 10 years and can be renewed for an unlimited number of 10-year periods. Nationwide effect, constructive notice mark is the registrant's personal property. The registrant is entitled to use the registered trademark symbol ® in connection with a registered trademark or service mark. Use of symbol not mandatory. Note that the frequently used notations "TM" and "SM" have no legal significance.

Applicant can register mark if it’s been used in commerce (e.g., actually used in the sale of goods or services). Also register six months prior to proposed use in commerce, but if the mark is not used w/in period, applicant loses mark. A party other than registrant can submit an opposition to a proposed registration of a mark or the cancellation of a previously registered mark.


Trademarks, service marks, certification marks, and collective marks:

• TRADEMARKS: Distinctive mark, symbol, name, word, motto, or device identifies goods of particular business. E.G.: words: Chevrolet, CocaCola, and IBM.

• SERVICE MARKS. Distinguish services of holder from competitors. Trade names: United Air Lines, Marriott International, and Weight Watchers.

• CERTIFICATION MARKS: Certifies goods and services are of certain quality or originate from particular geographical areas (E.G.:, wines from Napa Valley; or Florida oranges). Owner of the mark usually nonprofit corporation that licenses producers that meet certain standards or conditions to use the mark.

• Collective marks: Cooperatives, associations, and fraternal organizations. E.G.: Boy Scouts of America.

CERTAIN MARKS CANNOT BE REGISTERED. Include (1) flag or coat of arms of the U.S.A. , any state, municipality, or foreign nation; (2) immoral or scandalous; (3) geographical names standing alone (e.g., "South"); (4) surnames standing alone (note surname can be registered if accompanied by a picture or fanciful name, such as Smith Brothers cough drops); and (5) any mark resembles a mark already registered with the federal PTO.


For federal protection, must be distinctive or have acquired a "secondary meaning." E.G.: For Xerox and Acura are distinctive. Nike, Inc. has trademarked its Just Do It slogan which has taken on a secondary meaning. Descriptive words w/no secondary meaning cannot be trademarked. E.G.: “Cola” alone.


Anyone uses mark w/o authorization may be sued for trademark infringement. Trademark holder can seek damages and obtain injunction prohibiting further unauthorized use. Following case, Court found defendant franchisee had infringed franchisor's trademark.

Baskin-Robbins Ice Cream Co. v. D&L Ice Cream Co., Inc.

FACTS: Baskin-Robbins, franchisor established system of more than 2,700 franchise ice cream retail stores nationwide. Franchisees agree purchase ice cream in bulk only from Baskin-Robbins or authorized Baskin-Robbins source, to sell only Baskin-Robbins ice cream under "Baskin-Robbins" marks, and keep specific business hours. Franchisees agree pay ice cream invoices to Baskin-Robbins when due. If ice cream invoices not paid w/in seven days of delivery of ice cream, payment by certified check required. If not received, prepayment in cash required. If Baskin-Robbins must institute lawsuit for breach franchise agreement, franchisee required pay all costs incurred by Baskin-Robbins if successful in lawsuit. '78, Baskin-Robbins entered standard Franchise Agreement w/ D&L Ice Cream Co., granting franchise to operate retail ice cream store in Brooklyn, NY. During course of franchise, D&L consistently failed maintain proper business hours; failed satisfy ice cream invoices when due. BR properly invoked right to require payment by certified check; Not received, BR required prepayment for ice cream deliveries. D&L then purchased bulk ice cream from other manufacturers, sold it in its store, bearing Baskin-Robbins TM. Upon discovering, BR sent Notice of Termination.D&L ignored notice; continued to operate and sell other brands in cups and containers bearing BR TM. Baskin-Robbins sued D&L for trademark infringement.

ISSUE Did D&L infringe Baskin-Robbins trade-marks?

Decision Yes. Entitled permanent injunction, to recover outstanding monies owed by D&L, to all profits made by D&L as result of trademark infringement, full costs and attorney's fees incurred.

REASON: Sale by franchised licensee of unauthorized products: products outside scope of license, likely confuse public into believing products manufactured/authorized by trademark owner, when in fact not. D&L's activities during franchise agreement constituted infringement of BR's federally registered TM.

SEE 40.6 P. 686-7 Ramada Inns CASE

TRADE DRESS §43(a) of Lanham Act

"LOOK AND FEEL" of a product, its packaging, or service establishment. Evolving.

U.S.S.CT.: found infringing copying of trade dress. 505 U.S. 763, 112 S.Ct. 2753, 1992 U.S. lexis 4533 Supreme Court of the United States

Case 7.3. Trade Dress: Taco Cabana, Inc. v. Two Pesos, Inc.
Facts: Taco Cabana operated chain of fast food restaurants in Texas over ten years. Known for vivid colors & distinctive striping. Two Pesos, Inc., opened competing chain, w/similar motif.Aargued color scheme not yet acquired secondary meaning. Both lower Court & and Court of Appeals = favor of Taco Cabana.
Issue: Does a restaurant’s design have to acquire a secondary meaning before it is protected under the Trademark Act?
Decision: No.
Reason: USSCT.:The Supreme Court: trade dress = total image of a business w/ no basis for requiring secondary meaning. Would unduly burden a business if competitors were to be allowed to appropriate the originator’s dress in other markets, and could prevent the originator from expanding into and competing in these markets.



Companies owning trademarks spend millions advertising and promoting quality of goods and services sold under their names. Many become household names recognized by millions E.G.: CocaCola, McDonald's, Microsoft, and Nike. Traditional trademark law protected infringer used the mark and confused consumers as to the source of the goods or services. E.G.: if a knockoff company sold athletic shoes and apparel under the name "Nike," would be infringement.

Similar not exactly Owners of marks have valuable property right in marks should not be eroded, blurred, tarnished, or diluted in any way by another.

1. The mark must be famous.
2. The use by the other party must be commercial.
3. The use must cause dilution of the distinctive quality of the mark.

Dilution broadly defined: lessening of capacity of famous mark to identify and distinguish its holder's goods and services, regardless of presence or absence of competition between the owner and the other party. E.G.: other than Nike had a Web site titled it would be unlawful dilution.



Ideas making franchise successful but not qualify for trademark, patent, or copyright protection.


Most state laws protect trade secrets. Misappropriation called unfair competition. Holder of trade secret can sue offending party for damages and injunction to prohibit further unauthorized use.


E.G.: Person injured by franchisee's negligence: franchisee liable. Court held that franchisor directly liable to the plaintiffs.

SEE 40.2 P. 680 Martin v. McDonald's Corp


If properly organized and operated, franchisor and franchisee separate legal entities. Franchisor deals w/franchisee as independent contractor. No agency relationship, neither party liable for contracts/torts other.


If franchise properly organized and operated = Franchisor and Franchisee are separate legal entities. Therefore, Franchisor deals w/franchisee as an independent contractor. Franchisees liable on their own contracts and liable for their own torts (e.g.: negligence). Franchisors liable for their own contracts and torts. Generally, neither party liable for the contracts or torts of the other.

Example: McDonald's Corporation, fast~food restaurant franchisor, grants restaurant franchise to Tina Corp. Tina opens the franchise restaurant. One day, a customer @ franchise spills on chocolate shake on floor. Employees @ franchise fail to clean up spilled shake, one hour later, another customer slips on spilled shake; suffers severe injuries. Injured customer can recover damages franchisee, due to Tina’s negligence; BUT cannot recover damages from franchisor, McDonald's Corporation.
Example: If in preceding example, McDonald's Corp, franchisor, grants franchise to Gion Corp, the franchisee. McDonald's enters into loan agreement w/City Bank, & borrows $100M. Gion Corp,franchisee, not liable on the loan. McDonald's, franchisor and debtor, liable on the loan.

If franchisee actual or apparent agent of franchisor, franchisor responsible for torts and contracts of franchisee committed or entered into w/in scope of the agency.



Georgia Girl, fran¬chisor licenses franchisees operate women's retail cloth¬ing stores under "Georgia Girl" trademark. Georgia Girl franchise to franchisee operate store Georgia Girl Did not supervise/control day-to-day operations. McMullan entered store exchange blouse, found nothing to exchange for, began to leave store. Physically restrained, accused of shoplifting blouse.Taken to local jail, held until claim of prior purchase could be verified. Store then dropped charges and released from jail. McMullan filed action against store owner and Georgia Girl to recover damages for false imprisonment. Is Georgia Girl liable?

Tort Liability

SEE 40.5 P. 686 Seven-Up CASE


Apparent agency created when franchisor leads third party believe it. EXAMPLE: Franchisor and franchisee use same trade name and trademarks; making no effort to inform public of separate legal status. Mere use of same name not automatically make franchisor liable for franchisee's actions.

Here: Franchisee apparent agent of franchisor, making franchisor liable for tortious conduct of franchisee.

SEE P. 40.1 PAGE 679


FACTS: Holiday Inn, franchisor licenses franchisees to operate hotels using trademarks and service marks. Licensed Hospitality Venture to operate franchised hotel in Fort Pierce, Florida. Rodeo Bar, reputation "hottest bar in town," located in hotel. Holiday Inn and Bar not sufficient parking, so security guards posted in Holiday Inn parking lot; required Rodeo Bar patrons park in vacant lots surrounded hotel not owned by hotel. Main duty of guards keep parking lot open for hotel guests. Two unarmed security guards on duty night in question. One guard drank on job; other untrained temporary fill-in. Though Bar had capacity of 240 people, bar regularly admitted 270-300, w/50-75 waiting outside. Fights occurred all the time in bar and
parking lots, often three/four fights/night. Police reports involving 58 offenses, including several weapons charges, as well as A&B charges, filed during previous 18 months. Night in question: two groups involved not leave Bar until closing time. Exchanged remarks as moved toward respective vehicles in vacant parking lots adjacent Holiday Inn. During combat, Carter shot Rice, Turner, and Shelburne. Rice died; heirs sued franchisee, Hospitality Venture, and franchisor, Holiday Inn.

HISTORY: Trial court: Hospitality Venture negligent not providing sufficient security to prevent foreseeable incident. Also Hospitality apparent agent of Holiday Inn, therefore HI vicariously liable for franchisee's tortious conduct. Turner awarded $3,825,000 for injuries. Shelburne received $1M, and Rice's interests $1M.

ISSUE: Are franchisee and franchisor liable?

Decision Yes. Franchisee negligent and franchisee apparent agent of franchisor.

REASONING: Franchisee always liable own tortious conduct. Franchisor may be held liable for tortious conduct of franchisee if franchisee "apparent agent".Franchisor misleads public into believing franchise really owned/operated by franchisor, even though not. HI led public into believing franchisees part of Holiday Inn's system, not independently owned businesses. Reservation system, as well as signs at hotel, gave appearance to public. Therefore, Holiday Inns vicariously liable tortious conduct of its franchisee.


Tying Arrangements

Restraint of trade: seller refuses sell one product (the tying product) to customer unless customer agrees purchase second product (the tied product) from seller. Most tying arrangement in goods violate Section 3 Clayton Antitrust Act. Those involving goods/services unreasonable restraints of trade violation § 1 Sherman Antitrust Act. Laws intended prevent sellers from using market power in product to force sales of another product. Party injured by unlawful tying arrangement can sue wrongdoer for treble (triple) damages if can prove:

A. Wrongdoer tied sales of two separate products or services

B. More than a de minimus (small) amount of commerce was affected

C. Sufficient market power existed to enforce arrangement

D. Arrangement caused unreasonable restraint of trade or substantial lessening of competition

Sports Franchises: I'll Take My Ball and Go Home

Brooklyn lost Dodgers, Minneapolis lost Lakers, Baltimore lost Colts. Despite adage: "time heals all wounds" these and other American cities that have lost home team franchises never quite same. Addition to emotional toll on fans, economic cost of relocation on ex-hometown staggering. Leagues that grant professional sports franchises frown upon team relocation and many incorporate clauses into teams' contracts prohibiting relocating. When teams packed bags in defiance: many leagues gone to court. Response, teams charged anti-relocation provisions guarantee existing home team monopoly over city's sports market. Argue: rules violate antitrust laws prevent teams from entering markets of choice and freely competing w/ other teams.

Leading case: Infamous decision Al Davis, owner Oakland Raiders, move pro football team from Oakland to LA in '80. At time, NFL's relocation rule required approval of request to move by 75% of owners. Vote not even close—22 teams voted against 5 teams abstained. Raiders sued NFL, claiming league's relocation rules violated Sherman Antitrust Act.

Held: Relocation rule adopted especially to prevent competition among teams in each city in violation of Sherman Act. The NFL rule struck down.

Court decision clearly strikes blow for free competition, also virtually ensures will be more team relocations and more heartbroken home team fans—in the future. Note: In 1995, Al Davis fled Los Angeles and moved the Raiders back to Oakland. This time, no other owner voted against the move. [Los Angeles Memorial Coliseum Commission v. National Football League, 726 F.2d 1381 (9th Cir. 1984), cert. denied, 469 U.S. 990 (1984)]


Franchisor can terminate for "just cause" (e.g., nonpayment of franchise fees by franchisee, continued failure meet quality control standards is just cause. Unreasonably strict application of just cause termination clause constitutes wrongful termination. EXAMPLE, Single failure meet quality control standard not cause for termination.

Franchise agreement usually contains provisions permitting termination if certain events occur. Franchisor's right to terminate has been source of lot of litigation.


ADDITIONAL CASE ADD ON: "76, Amoco purchased land in question constructed a two-bay gasoline sta¬tion cost of $125K. Leased to Burns, operated Amoco gas station. Mintained throug series of written one-year leases. Automatic renewal unless either party written notice of cancellation prior to end of current term. 6/8/77, Amoco gave Burns written notice of nonrenewal directed Burns vacate premises effective 9/10/77. Suffering steadily decreasing sales volume and unprof¬itable location for Amoco. No reasonable steps could be taken to increase sales volume at site to make it profitable. Amoco planned on discontinu¬ing sale of gas at site and selling property. Burns sued Amoco for wrongful termination? Who wins?


39.8. Amoco. Amoco, franchisor, could terminate agreement if it had "good cause". Made for legitimate business reason station unprofitable and no reasonable means of making station profitable. A good faith business judgment supported by facts.

"It is the privilege of a trader in a free country, in all matters not contrary to law, to regulate his own mode of carrying it on according to his own discretion and choice." B. Alderson Hilton v. Eckersley (1855)


Generally held void: on grounds: unconscionable. Franchisee spent time, money, and effort developing franchise. If terminated w/o just cause, franchisee can sue franchisor for wrongful termination. Franchisee can recover damages caused by unlawful termination and recover franchise.


Gasoline stations are among oldest franchises in the US, Act enacted in 1979, prohibits oil company franchisors from terminating w/o just cause.


Automobile company franchisors prohibited from terminating automobile dealer franchises w/o just cause. The Automobile Dealers Day in Court Act was enacted to ensure that this does not happen.

SEE 40.7 P. 687 Kawasaki CASE, Japanese corporation, manufactures motorcycles dis¬tributes in United States through subsidiary, Kawasaki Kawasaki USA. Kawasaki USA, franchisor grants franchises to deal¬erships to sell Kawasaki motorcycles. '71, Kawasaki USA granted Kawasaki Shop of Aurora, Inc. Dealer, franchise to sell Kawasaki motorcycles in Aurora, Illinois. Changed locations twice. Both moves w/in five-mile exclusive territory granted Dealer in agreement. Dealer did not obtain Kawasaki written approval for either move as required by agreement. Kawasaki USA acquiesced to first move, not sec¬ond. At second location, Dealer also operated Honda and Suzuki motorcycle franchises and negotiat¬ing to operate Yamaha franchise. Kawasaki agreement expressly permitted multiline dealerships. Kawasaki USA objected to second move, asserting Dealer had not received written approval for move as required by agreement. How¬ever real reason objected because did not want its motorcycles sold at same location as others. Kawasaki ter¬minated Dealer's franchise. Dealer sued Kawasaki USA for wrongful termination. Who wins? [Kawasaki Shop of Aurora, Inc. v. Kawasaki Motors Corporation, U.S.A., 544 N.E.2d 457 (Ill. App. 1989)]

A lawful franchise agreement is an enforceable contract. Each party owes a duty to adhere and perform under contract terms of franchise agreement. If agreement breached, aggrieved party can sue breaching party for rescission, restitution and damages. As here where proper termination of franchise agreement:

Dunkin’ Donuts of America, Inc. v. Middletown Donut Corporation

Facts: Smothergill, through two corporations, entered ifranchise & lease agreements w/Dunkin’ Donuts to operate Dunkin’ Donuts franchise shops in Middletown and West Long Branch, New Jersey. Smothergill paid $115K for 2 franchises. Under each agreement, Smothergill required to keep accurate sales records, pay basic franchise fee of 4.9% of gross sales, and pay advertising fee of 2% of gross sales. The lease agreements conditioned on Smothergill’s remaining franchisee in good standing under franchise agreements.
Subsequently, Dunkin’ Donuts notified Smothergill franchise agreements being terminated due to intentional underreporting gross sales. The notice provided opportunity for Smothergill to cure breach by making prompt payment of proper amounts due. Smothergill made no attempt to cure & refused to abandon his Dunkin’ Donuts shops. Dunkin’ Donuts sued to enforce claimed right of termination and to collect damages. Trial court permitted Dunkin’ Donuts to terminate. Smothergill appealed.
Issue: Was franchise agreements properly terminated “for cause” by Dunkin’ Donuts?
Decision: NJ Supreme Court: Smothergill intentionally breached franchise agreements and Dunkin’ Donuts had properly terminated Smothergill as franchisee.
Reason: At the conclusion of the trial, the trial court found as fact Smothergill had been guilty of substantial, intentional, and long-continued underreporting gross sales at both of his Dunkin’ Donuts stores; he had failed to keep financial records required under franchise agreements and failure not the result of carelessness or incompetence. Rather, delinquency in recordkeeping was part of deliberate effort to underreport sales, which in turn would result in underpayment of franchise fees, underpayment of advertising fund fees, underpayment of rental override charges, and evasion of federal and state taxes. In short, the trial court found as a fact that Smothergill was “guilty of unconscionable cheating.” Franchisee who gets caught w/his hand in the proverbial cookie jar (or doughnut box, as the case may be) must suffer the consequences.
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