ALTERNATE CASE PROBLEM ANSWERS
CHAPTER 36
SMALL BUSINESSES AND FRANCHISES
36-1A. Good faith in franchising relationships
The Lareses prevailed. Although the district court ruled that the contract gave the franchisor an
unqualified right to refuse to consent to the proposed sale, the court of appeals disagreed. The
appellate court held that even though landlords have been given the unqualified right to refuse
36-2A. Franchise termination
The trial court entered a judgment in favor of AB & B, and Banfi appealed. The appellate court
held that Banfi did not demonstrate bad faith in terminating the distributorship but that Banfi did
show a lack of just cause. In examining the issue of bad faith, the court noted that the state
B-2 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 36
represented by decisions that were “not arbitrary and [were] made for fundamental business
36-3A. Franchise termination
The court denied the Huangs’ application for a preliminary injunction on the ground that the
evidence did not indicate that Holiday Inns had acted in an “arbitrary and capricious manner” in
terminating the franchise. The court held that, on the contrary, Holiday Inns’ decision to
terminate was based on good cause. The Huangs had been given a detailed description in
36-4A. Franchise termination
The board issued an order finding, among other things, that Lone Star did not maintain a current
inventory, its sales did not meet goals agreed to between the parties, and Lone Star disparaged
Winnebago products to consumers and otherwise failed to actively promote them. This, the
APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 36 B-3
36-5A. Franchise termination
The court explained that “[g]ood cause exists for terminating the franchise where a franchisee
fails to substantially comply with the franchise agreement.” The court pointed out that “the
evidence overwhelmingly shows that OMI breached a material term of the franchise agreement
36-6A. Good faith in franchise relations
The Supreme Court of Appeals of West Virginia held, among other things, that an offer to renew
the lease or franchise was not required by the implied obligation of good faith, fair dealing, and
36-7A. The franchise contract
The New Jersey state trial court dismissed the suit, a state appellate court affirmed the
dismissal, but on Entre’s appeal, the New Jersey Supreme Court reversed. The state supreme
court extended the state auto-dealer franchise law to cover other franchisees on the basis of
B-4 APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 36
36-8A. Franchise termination
The court granted McDonald’s motion to dismiss C.B.’s counterclaims. The court emphasized
that C.B. failed to comply with the terms of the franchise agreement. C.B. argued in part that
McDonald’s previous exercises of discretion, in regards to late payments, meant that its failure
36-9A. Franchise termination
A jury found in favor of A/C on its breach of contract claims and awarded A/C $40,000 damages
on the “Tulsa breach of contract” (but also awarded Lennox $233,236 on its counterclaim for
A/C’s outstanding account balance). Lennox (and A/C) appealed to the U.S. Court of Appeals
36–10A. Sole proprietorship
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 as goodwill on the whole is. If the value of goodwill can be reasonably
APPENDIX B: ALTERNATE CASE PROBLEM ANSWERS—CHAPTER 36 B-5