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A special privilege to do certain things that is conferred by government on an individual or a corporation and which does not belong to citizens generally of common right, e.g., a right granted to offer Cable Television service.

A privilege granted or sold, such as to use a name or to sell products or services. In its simplest terms, a franchise is a license from the owner of a trademark or Trade Name permitting another to sell a product or service under that name or mark. More broadly stated, a franchise has evolved into an elaborate agreement under which the franchisee undertakes to conduct a business or sell a product or service in accordance with methods and procedures prescribed by the franchisor, and the franchisor undertakes to assist the franchisee through advertising, promotion, and other advisory services.

The right of suffrage; the right or privilege of voting in public elections. Such right is guaranteed by the Fifteenth, Nineteenth, and Twenty-fourth Amendments to the U.S. Constitution.

As granted by a professional sports association, franchise is a privilege to field a team in a given geographic area under the auspices of the league that issues it. It is merely an incorporeal right.

Government Franchises

The consideration that is given by a person or corporation in order to receive a franchise from the government can be an agreement to pay money, to bear some burden, or to perform a public duty. The primary objective of all grants of franchises is to benefit the public; the rights or interests of the grantee, the franchisee, are secondary. A corporation is a franchise, and the various powers conferred on it are also franchises, such as the power of an insurance corporation to issue an insurance policy.Various types of business—such as water companies, gas and electric companies, bridge and tunnel authorities, taxi companies, along with all types of corporations—operate under franchises.

The charter of a corporation is also called its general franchise. A franchise tax is a tax imposed by the state on the right and privilege of conducting business as a corporation for the purposes for which it was created and in the conditions that surround it.

Power to Grant The power to grant franchises is vested in the legislative department of the government, subject to limitations imposed by the state constitution. A franchise can be derived indirectly from the state through the agency that has been duly designated for that purpose, such as the local transportation agency that can grant a franchise for bus routes. Franchises are usually conferred on corporations, but natural persons can also acquire them. The grant of a franchise frequently contains express conditions and stipulations that the grantee, or holder, of the franchise must perform.

Not every privilege granted by a governmental authority is a franchise. A franchise differs from a license, which is merely a personal privilege or temporary permission to do something; it can be revoked and can be derived from a source other than the legislature or state agencies. A franchise differs from a lease, which is a contract for the possession and profits of property in exchange for the payment of rent.

Regulation Once a franchise is granted, its exercise is usually subject to regulation by the state or some duly authorized body. In the exercise of police power—which is the authority of the state to legislate to protect the health, safety, welfare, and morals of its citizens—local authorities or the political subdivisions of the state can regulate the grant or exercise of franchises.

Right to Compete While a franchise can be exclusive, exclusiveness is not a necessary element of it. Nonexclusive franchises—including those to function or operate as a public utility—do not include the right to be free of competition. The grant of such a franchise does not prevent the grant of a similar franchise to another entity, or lawful competition on the part of public authorities. The holder of a nonexclusive franchise is entitled to be free from the competition of an entity that does not have a valid franchise to compete. The holder can institute a proceeding for an injunction—a court order that commands or prohibits a certain act—and monetary damages for the unlawful invasion of the franchise.

Duration The legislature can prescribe the duration of a franchise. The powers of local authorities or political subdivisions of the state depend upon the statute that confers the power to make grants and upon any constitutional limitation.

A franchise can be terminated by the mutual agreement of the state that is the franchisor, and the grantee or the franchisee. It can be lost by Abandonment, such as when a corporation dissolves because of its fiscal problems. A mere change in the government organization of a political subdivision of a state does not divest franchise rights that have been previously acquired with the consent of local authorities. A franchise cannot be revoked arbitrarily unless that power has been reserved by the legislature or proper agency.

Forfeiture A franchise can be subject to Forfeiture due to nonuse. Misuse or failure to provide adequate services under the franchise can also result in its loss. The remedy for nonuse or misuse lies with the state. Persons other than the state or public authorities cannot challenge the validity of the exercise of a franchise unless they can demonstrate that they have a peculiar interest in the matter distinct from that of the general public.

Invasion of the Franchise A person or corporation holding a valid franchise can obtain an Injunction to prevent the unlawful invasion of the franchise rights and can sue for monetary damages if there has been financial loss as a result of the infringement.

Transfer of Franchises Subject to applicable constitutional or statutory limitation, franchises can be sold or transferred. Where the franchises involve public service, they cannot be sold or transferred unless there is authorization by the state. The person or corporation purchasing the franchise in an authorized sale takes it subject to its restrictions.

Private Franchises

Certain written contractual agreements are sometimes loosely referred to as franchises, although they lack the essential elements in that they are not conferred by any sovereignty. The franchise system, or method of operation, has had a phenomenal growth in particular consumer product industries, such as automobile sales, fast foods, and ice cream. The use of a franchise in this manner has enabled individuals with minimal capital to invest to become successful members of the business community.

Under the most common method of operation, the cornerstone of a franchise system must be a trademark or trade name of a product. A franchise is a license from an owner of a trademark or trade name permitting another to sell a product or service under the name or mark. A franchisee agrees to pay a fee to the franchisor in exchange for permission to operate a business or sell a product or service according to the methods and procedures prescribed by the franchisor as well as under the trade name or trademark of the franchisor. The franchisee is usually granted an exclusive territory in which he or she is the only distributor of the particular goods or services in that area. The franchisor is usually obligated by contract to assist the franchisee through advertising, promotion, research and development, quantity purchasing, training and education, and other specialized management resources.

Before 1979 few state legislatures had enacted laws to protect prospective franchisees from being deceived by the falsehoods of dishonest franchisors. These laws, known as franchise disclosure laws, mandated that anyone offering franchises for sale in the state had to disclose material facts—such as the true costs of operating a franchise, any recurring expenses, and substantiated reports of profit earned—that would be instrumental in the making of an informed decision to purchase a franchise.

In states that did not have such legislation, the unsophisticated investor was at the mercy of the franchisor's statements. A victimized franchisee could sue a franchisor for breach of contract, but this was an expensive proposition for someone who typically had invested virtually all of his or her financial resources in an unprofitable franchise. Franchisors confronted with numerous lawsuits often would declare Bankruptcy so that the franchisees had little possibility of recouping any of their investments.

The Federal Trade Commission (FTC) received numerous complaints about inequitable and dishonest practices in the sale of such franchises. In late 1978, it issued regulations, effective October 21, 1979, that require franchisors and their representatives to disclose material facts necessary to make an informed decision about the proposed purchase of a franchise and that establish certain practices to be observed in the franchisor-franchisee relationship. These rules are collectively known as the Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures, or more simply, the Franchise Rule.

A franchisor must disclose the background of the company—including the business experience of its high-level executives—for the previous five years; and whether any of its executives, within the last seven years, have been convicted of a felony, have pleaded nolo contendere to Fraud, have been held liable in a civil action for fraud, are subject to any currently effective court order or Administrative Agency ruling concerning the franchise business or fraud, or have been involved in any proceedings for bankruptcy or corporate reorganization for insolvency during the previous seven years.

In addition, there must be a factual description of the franchise as well as an unequivocal statement of the total funds to be paid, such as initial franchise fees, deposits, down payments, prepaid rent on the location, and equipment and inventory purchases. The conditions and time limits to obtain a refund, as well as its amount, must be clear as well as the amount of recurring costs, such as royalties, rents, advertising fees, and sign rental fees. Any restrictions imposed—such as on the amount of goods or services to be sold, the types of customers with which the franchisee can deal—the geographical area, and whether the franchisee is entitled to protection of his or her territory by the franchisor must be discussed. The duration of the franchise, in addition to reasons why the franchise can be terminated or the franchisee's license not renewed when it expires, also must be explained. The number of franchises voluntarily terminated or terminated by the franchisor must be reported. The franchisor must disclose the number of franchises that were operating at the end of the previous year, as well as the number of company-owned outlets. The franchisee must also be supplied with the names, addresses, and telephone numbers of the franchisees of the ten outlets nearest the prospective franchisee's location, so that the prospective franchisee can contact them to obtain a realistic perspective of the daily operations of a franchise.

If the franchisor makes any claims about the actual or projected sales of its franchises or their actual or potential profits, facts must be presented to substantiate such statements.

All of these facts—embodied in an accurately, clearly, and concisely written document—must be given to the prospective franchisee at the first personal meeting or at least ten days before any contractual relationship is entered or deposit made, whichever date is first. The purpose of this disclosure statement is to provide the potential investor with a realistic view of the business venture upon which he or she is about to embark. Failure to comply with the FTC regulation could result in a fine of up to $10,000 a day for each violation.

Some states have also enacted laws that prohibit a franchisor from terminating a franchise without good cause, which usually means that the franchisee has breached the contract. In such a case, the franchisor is entitled to reacquire the outlet—usually by repurchasing the franchisee's assets, such as inventory and equipment.

In states without "good cause" laws, franchisees claim that they are being victimized by franchisors who want to reclaim outlets that have proven to be highly profitable. They allege that the franchisor imposes impossible or ridiculous demands that cannot be met to harass the franchisee into selling the store back to the franchisor at a fraction of its value. Company-owned outlets yield a greater profit to the franchisor than the royalty payments received from the franchisee. Other franchisees claim that their licenses have been revoked or not renewed upon expiration because they complained to various state and federal agencies of the ways in which the franchisors operate. Such controversies usually are resolved in the courtroom.

Further readings

Andrews, Chris. 2003."Granholm Pushing for Financial Disclosure Law." Lansing State Journal (June 18).

Siatis, Perry C. 2000. "Assessing the FTC's Proposed Franchise Rule Provisions Involving Electronic Disclosure." Brigham Young University Law Review (May 20).

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.


1) n. a right granted by the government to a person or corporation, such as a taxi permit, bus route, an airline's use of a public airport, business license, or corporate existence. 2) n. the right to vote in a public election. 3) v. to grant (for a periodic fee or share of profits) the right to operate a business or sell goods or services under a brand or chain name. Well-known franchise operations include McDonald's, Holiday Inns, Ace Hardware, Rexall Drug Stores, and Amway Distributors. 4) n. the right one has to operate a store or sell goods or services under a franchise agreement, as in "we have the Taco Bell franchise in our town." 5) adj. referring to a "franchise tax" which is placed on businesses (especially corporations) for the right to conduct business, as distinguished from a tax on property, income or profits tax.

Copyright © 1981-2005 by Gerald N. Hill and Kathleen T. Hill. All Right reserved.


1 a business arrangement whereby a trader allows another to use his business expertise and to utilize the goodwill of the business and perhaps share its intellectual property in return for fees and commissions or a single price. The legal implications and documentation differ depending on the kind of franchise, but the arrangement produces money only because of the web of contractual documentation. The self-employed businessman who is the franchisee pays more than the usual start-up costs but is likely to be able to succeed if the franchise is one that has proven to be successful. The franchisee does not require to have as many business skills as the usual start-up or first-time entrepreneur.
2 in England the Legal Aid Board, now the LEGAL SERVICES COMMISSION, introduced a system of approving certain firms to offer legal aid, said to be franchised.
Collins Dictionary of Law © W.J. Stewart, 2006
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