Business Law, 8e (Cheeseman)
Chapter 40 Franchises and Special Forms of Businesses
1) A franchisee is established when parties of a general partnership conduct business outside the
state of their incorporation.
2) 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.
3) In an area franchise, the franchisor authorizes the franchisee to negotiate and sell franchises on
behalf of the franchisor.
4) A distributorship franchisee is called a subfranchisor.
5) FTC franchise rule is a rule that requires franchisors to make full presale disclosures to
prospective franchisees.
6) The FTC does not require the registration of the disclosure document with the FTC prior to its
use.
7) A franchisor that makes sales or earnings projections based on hypothetical examples need not
disclose the assumptions underlying the estimates.
8) If the product or service offered by a franchisor has not been tested, it should appear on the
FTC franchise notice.
9) Uniform Franchise Offering Circular refers to a uniform disclosure document that requires a
franchisor to make specific presale disclosures to prospective franchisees.
10) The UFOC satisfies only the FTC and a separate disclosure document should be prepared by
the franchisor in accordance with state regulations.
12) Franchisors are not permitted to disclose trade secrets and product formulas to franchisees.
13) A royalty fee is an amount paid by the franchisor to the franchisee for the continuous use of
its trademarks and maintenance of quality.
14) In a franchise agreement, by default, the franchisor and franchisee are separate legal entities.
15) A franchisor deals with the franchisee as an independent contractor.
16) Unless otherwise states, the franchisor is liable for the torts of its franchisee.
17) Apparent agency arises when a franchisee creates the appearance of being a franchisor’s
agent when in fact an actual agency does not exist.
18) 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.
19) 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.
20) A franchisor is not permitted to terminate a franchise under any cause.
21) A single failure by a franchise to meet a quality-control standard is sufficient cause for
termination.
22) Termination-at-will clauses in franchise agreements are generally held to be void.
23) The termination-at-will clause allows franchisees to sue a franchisor in case of an unjust
termination of franchise.
24) A franchisee subject to wrongful termination can only recover damages, and not the
franchise.
25) Licensing refers to a business arrangement that occurs when the owner of intellectual
property contracts to permit another party to use the intellectual property.
26) A franchise is an example of a license.
27) A joint venture is an arrangement in which two or more business entities combine their
resources to pursue an ongoing business operation.
28) A joint venture resembles a conglomeration, with a parent company and subsidiaries.
29) Joint venturers generally have equal rights to manage a joint venture.
30) Joint venturers do not owe each other fiduciary duties of a loyalty and care as they are not
bound by a contract.
31) A joint venturer is not personally liable for the debts and obligations of the joint venture
partnership.
32) A joint venture is generally an implied contract that lasts until a party disassociated at will.
33) Joint venturers are permitted to create a corporation that operates the joint venture.
34) A strategic alliance is an arrangement between two or more companies whereby they agree
to ally themselves and work together to accomplish a designated objective.
35) Partners to a strategic alliance can be potential competitors to each other.
36) A(n) ________ is established when one party licenses another party to use the first party’s
37) 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 as a joint venture.
38) 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
39) 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
40) 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
41) In a ________ 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
42) 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 the Rio-Werner
Corporation’s franchise plan?
A) processing plant
B) area
C) distributorship
D) chain-style
43) 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
44) The area franchisee is also called a ________.
A) joint venturer
B) limited partner
C) subfranchisor
D) strategic partner
45) 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) Pepsi Co. 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.
46) 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)
47) Which of the following does the FTC franchise rule require from franchisors?
A) registration of the disclosure document with the FTC before it’s 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
48) 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
49) 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
50) 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) non-disclosure of sales or earnings projections
D) fraudulent disclosure by the franchisor
51) 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) non-disclosure of sales or earnings projections
D) fraudulent disclosure by the franchisor
52) Where should the FTC franchise notice appear?
A) in the licensing agreement between the franchisor and franchise
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
53) Which of the following is imposed upon a franchisor that violates the 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
54) 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
55) 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
56) 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.
57) 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 UFOC sets forth the terms and conditions for 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.
58) 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
59) 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
60) 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.
61) 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
62) A(n) ________ 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
63) 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
64) My-Wear Inc. is an apparel retailer based in San Francisco. It operates through a franchise
named KL Apparels Ltd. 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 has 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
65) Which of the following is true for a franchisee 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.
66) ________ 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
67) The party who grants a license is known as the ________.
A) licensee
B) licensor
C) grantee
D) grantor
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
69) The party to whom a license is granted is known as the ________.
A) licensee
B) licensor
C) grantee
D) grantor
70) 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, in return for a
fee. In this arrangement, YouKnow Inc. is the ________.
A) donor
B) trustee
C) grantor
D) licensor
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
72) 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
73) Which of the following closely resembles a joint venture?
A) a conglomerate
B) a merged company
C) a franchise
D) a partnership
74) Which of the following is true of a joint venture?
A) The parties to a joint venture are considered as 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.
75) Concreate Development requires architects to design its latest venture—a 64-storeyed
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(n) ________.
A) licensing arrangement
B) franchise
C) limited partnership
D) joint venture
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 by the ratio of their
capital investment.
D) Each joint venture is liable for the debts and obligations of the joint venture.
77) A(n) ________ 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
78) JK Developers and KL Designs, who are experts in architectural engineering, form a
business agreement whereby they agree to work together for two years, in order to complete the
design of a planetarium. This is an example of a(n) ________.
A) franchise
B) licensing agreement
C) strategic alliance
D) limited partnership
79) Which of the following is true of a strategic alliance?
A) Strategic alliances cannot have more than two entities involved.
B) Strategic alliances cannot be formed between fellow competitors.
C) Strategic alliances are usually formed to accomplish multiple business ventures.
D) Strategic alliances do not provide the same protection and stability as mergers.
80) Explain in brief the four basic types of franchises.
81) What are the steps a prospective franchisee must take in order to acquire a franchise? What
properties are generally licensed by franchisors?
82) Explain the extent of liability of a franchisor and a franchisee with an example.
83) When is a franchisor allowed to terminate a franchise? Why are termination-at-will clauses
generally held to be void?
84) Explain in brief the concept of joint venture as a business arrangement.