Franchising Law

What is Franchise Law?

Franchise Law relates to the business model of franchising. Franchising is a business practice that allows the franchising company to license its business model, intellectual properties (such as logos, trademarks, and patents), and corporate goodwill to another company or individual. The franchise model allows a company to expand quickly and is an alternative to the building of multiple locations all owned by a single person or entity. The single owner, or 'chain store' model, requires significant investment by the owner at both startup and throughout the operation of the satellite locations. Meanwhile, franchising allows the parent company to pass much of the expense of expansion on to the persons or entities who license the business franchise rights.

Franchise Model

In franchising, the franchisor (the licensing parent company) licenses the use of its business model to other companies that are allowed to open their own operations using the franchisor's name, trade marks, distribution network, and products/services. The franchisee (the child company that wants to buy into the franchisor's business model) pays a royalty to the franchisor for use of the business model, marks, and name, and is normally granted access to the franchisor's distribution network from which it buys its products. As a result, the franchisor usually acts as not just the originator of the business idea, but also takes on more of a supply role. Meanwhile, the franchisee handles all day-to-day customer interactions.

Franchising allows the franchisor to expand quickly without enormous expenditures of capital. Franchising provides a means to distribute the expense for new locations and operations among the franchisees while the franchisor does not have to sell interests in its company. However, franchising does require the franchisor to relinquish some of its control over its satellite locations.

Culture of Franchising in America

The United States has a long history of franchising, dating back to the 1930's when it first gained popularity among fast-food restaurants, food inns and, motels. As of 2005, there were 909,253 established franchised businesses, generating $880.9 billion of output and accounting for 8.1 percent of all private, non-farm jobs. This amounts to 11 million jobs, and 4.4 percent of all private sector output. Examples of well known franchise-based brands include Subway and McDonald's (restaurants), 7-Eleven (convenience stores), Hampton Inns & Suites (hotels), Great Clips (hair salons), H&R Block (tax preparers), and many more.

Legal Issues Related to Franchising

Each party to a franchise has several legal interests to protect. The franchisor is involved in securing protection for the trademark, controlling the business concept, and securing the know-how of its business model. It must consider the legalities of its distribution and shipping models, the tax implications of its franchising system, the contract terms to enforce its rights, and the potential for pass-through liability it may experience as a result of the actions or inactions of its franchisees.

The franchisee, on the other hand, is obligated to carry out the services for which the trademark has been made prominent or famous. There is a great deal of standardization required, and this is usually enforced through strict, carefully worded contracts known as franchising agreements. For example, the franchisee normally has to display the franchisor's signs, logos, and trademark prominently, must adhere to dress policies, must meet certain minimum customer service standards, etc. Failing to do so can result in a breach of the franchising agreement and termination of the right to use the franchisor's model, name, and logos (effectively putting the franchisee out of business). Additionally, the franchisee must handle day-to-day employment issues, procurement of supplies not provided by the franchisor, health code standards, and many others.

If you are looking for more information about franchising, and the legal considerations that come with it, you should review the materials found below. Additionally, should you require the assistance of an attorney to answer your questions, prepare or review your agreements, resolve disputes, or provide any other legal services, you may find an attorney in your area on our Law Firms page.


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