315
CHAPTER 36
SOLE PROPRIETORSHIPS
AND FRANCHISES
ANSWER TO CRITICAL ANALYSIS
QUESTION IN THE FEATURE
INSIGHT INTO ETHICS—CRITICAL THINKING—INSIGHT INTO THE BUSINESS ENVIRONMENT (PAGE 710)
If the law required franchisors to provide estimates of potential earnings, would there be more or less
growth in the number of franchises? All franchisors under such a new law would have to provide some
type of estimate of potential earnings. As a consequence, we will probably see a lower growth in
franchises because franchisors will wish to avoid potential prosecution for providing inflated earnings
estimates. Franchisors will therefore provide “low–ball” estimates. These “low–ball” future earnings
estimates will induce fewer individuals to become franchisees.
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 36.1—QUESTIONS (PAGE 708)
WHAT IF THE FACTS WERE DIFFERENT?
If Mundelein had identified itself as a residence when ordering the satellite system, how might the result
in this case have been different? The result would not likely have been different. Antennas, through
Garcia or some other employee, would have installed the system at the restaurant, which, according to
the court, was clearly a commercial establishment, The court held the defendant liable because he,
through his proprietorship and its employee, allowed the prizefight broadcasts to be available to a
commercial establishment without authorization.
316 UNIT EIGHT: BUSINESS ORGANIZATIONS
THE GLOBAL DIMENSION
Because the Internet has made it possible for sole proprietorships to do business worldwide without
greatly increasing their costs, should they be considered, for some purposes, the equivalent of other
business forms Why or why not? Probably not. Most sole proprietorships remain small: what may
CASE 36.2—QUESTIONS (PAGE 713)
THE ETHICAL DIMENSION
From an ethical perspective, if LJL had been allowed to invoke the right-to-cure provision, could it have
undone its wrongdoing so that the franchise relationship could have continued? Why or why not?
Probably not. No amount of payment for LJL’s theft could restore Pilot’s business trust and confidence in
its franchisee. More than revenue or profit, that is what was lost by the breach. LJL’s lack of ethics in its
acts of self-dealing, and its legal breach of the agreement, undermined the parties’ relationship to the
extent that their deal could probably not be restored. Pilot might have been justified in rescinding the
contract even if it had been for a fixed term with no right of termination.
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that Pilot had terminated its franchise agreement simply because it no longer wished to be
bound. Would refusing to allow LJL to invoke the right-to-cure provision in that circumstance have been
valid? No. A party’s attempt to terminate an agreement not because of any egregious or fraudulent
CASE 36.3—QUESTIONS (PAGE 715)
1A. The PMPA regulates only the circumstances in which franchisors may terminate a franchise or
decline to renew a franchise relationship. Are there any reasons why Congress might have limited the
scope of the PMPA to just these two aspects of franchising? Explain. In enacting the PMPA, Congress
left undisturbed the body of state law, including contract law and state statutes and regulations,
governing franchising relationships. As noted in this chapter, contract law applies to all contracts,
including franchise contracts. If the franchised business involves the sale of goods, Article 2 of the
CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES 317
Uniform Commercial Code applies. Most states have also enacted legislation governing specific aspects
of franchising relationships, largely for the purpose of protecting franchisees against dishonest
franchisors and to prevent franchisors from terminating franchises without good cause. The federal
government has limited its involvement in the franchising area, restricting its regulation to just certain
industries. For example, the Automobile Dealers’ Franchise Act of 1965 offers protections for
automobile dealerships. In addition, the 1978 Franchise Rule of the Federal Trade Commission imposed
disclosure requirements on franchisors so that franchisees can better evaluate the risks and benefits of
an investment. When Congress enacted the Petroleum Marketing Practices Act in 1979, it did not intend
to preempt state laws governing franchise relationships in the petroleum industry. Rather, it focused on
the two aspects of franchising in that industry with which it was most concerned—the termination of
and the failure to renew franchise relationships. Congress passed the PMPA only after concluding that
state laws did not offer sufficient protection to franchisees in these areas.
2A. Suppose that some of the service-station franchisees, on the expiration of their contracts with
Shell, signed a renewal agreement with Motiva, even though the franchisees believed that the rental
terms of the new agreement were unacceptable. Given the Court’s reasoning on the issue of
constructive termination, would the franchisees have been likely to succeed in a suit against the
franchisor for “constructive nonrenewal” of the franchise agreement? Why or why not? Probably not.
In fact, one of the issues in this case—not included in the excerpt of the Court’s opinion given in the
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Type of franchise
This is a chain-style business operation. Taco Bell, Burger King, and McDonald’s restaurants are other
examples of chain-style business operations.
2A. Sole proprietorship
If Del Rey operated the restaurant as a sole proprietorship, the loss for the damaged kitchen would be
his exclusively. One of the major disadvantages of a sole proprietorship is that the proprietor alone
318 UNIT EIGHT: BUSINESS ORGANIZATIONS
bears the burden of any losses or liabilities incurred by the business. Del Rey might have insurance to
help.
3A. Wrongful termination
The franchisor’s good faith and fair dealing in terminating the franchise would be the chief factor that a
court would consider in determining if the termination was wrongful.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE AT THE
END OF THE CHAPTER
All franchisors should be required by law to provide complete estimates of the profitability of a
prospective franchise based on the experiences of their existing franchisees. Because many franchisors
seem only to survive by selling more franchises—rather than from current operations—they tend to
exaggerate the potential profits than can be made. Those seeking to buy a new franchise are therefore
often provided with little hard evidence about how much profit they can expect to make. To prevent
ANSWERS TO QUESTIONS AND CASE PROBLEMS
AT THE END OF THE CHAPTER
36-1A. Franchising
(Chapter 36—Pages 708–715)
CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES 319
36-2A. QUESTION WITH SAMPLE ANSWER: Control of a franchise
The court would likely conclude that National Foods was responsible for the acts of harassment by the
36-3A. The franchise contract
(Chapter 36—Pages 711–712)
One of the primary concepts of the franchise arrangement is that the franchisor retains some control
over the marketing of the franchisor’s products. Therefore, as a general rule, reasonable territorial
restrictions, quality standards, and requirements for certain purchases of the franchisor’s products have
36-4A. Franchise termination
(Chapter 36—Pages 712–715)
320 UNIT EIGHT: BUSINESS ORGANIZATIONS
The Iowa Department of Transportation approved the termination of the franchise, finding the change in
36-5A. The franchise contract
(Chapter 36—Pages 709–710)
The court found that Jan-Pro committed fraud. Jan-Pro appealed to a state intermediate appellate court,
which affirmed the lower court’s judgment. The appellate court explained, “[W]here one is induced to
36-6A. Sole proprietorship
(Chapter 36—Pages 706–708)
The court entered a judgment in Ferguson’s favor. Consumers appealed to a state intermediate
appellate court, which affirmed the lower court’s judgment. The appellate court emphasized that “[t]he
36–7A. CASE PROBLEM WITH SAMPLE ANSWER: Franchise termination
In determining whether a franchisor has acted in good faith when terminating a franchise agreement,
the courts generally try to balance the rights of both parties. If the court perceives that the franchisor
acted arbitrarily or unfairly, the court will grant the franchisee a remedy. In this situation, the court
would consider the fact that the franchisee’s refusal to offer breakfast sandwiches containing pork was
36–8A. Sole proprietorship
(Chapter 36—Pages 706–708)
A sole proprietor’s reputation, skill, and relationships with customers can be valued by dividing these
qualities into “personal” and “enterprise” goodwill, with some goodwill associated with the business and
some solely due to the personal qualities of the proprietor. This distinction is as susceptible to valuation
36–9A. Franchise disclosure
(Chapter 36—Pages 709–710)
No, because a disclaimer would undercut the purpose for the requirement of disclosure. Yes, because
parties to agreements might discuss any number of issues during negotiation, and they should not be
36-10A. A QUESTION OF ETHICS: Sole proprietorship
(a) The court granted a summary judgment in Vilardo’s favor against Sheets and a default
judgment against Travel Center. The court awarded damages in the amount of $8,277.35, which was
trebled to $24,832.05 under the state consumer protection statute. On Sheets’s appeal, a state
intermediate appellate court affirmed the lower court’s judgments.
[them, are] conspicuously enunciated in the Ohio Civil Rules of Procedure.”
As for the ethics of the situation, carelessness, apathy, and ignorance can be caused by or lead to
unethical behavior. It seems likely that Sheets’s carelessness in regard to his client’s funds, his apathy
with respect to Vilardo’s complaint, and his ignorance of the requirements and consequences led to his
failure to do what needed to be done and resulted in his liability.