The concept of Franchising as we know today 1 st started in Germany in 1840.
In 1851, Singer Sewing Machine Co. began granting distribution franchises for its sewing machines. Thus began the modern concept of franchising.
The root word “Franchise” comes from old French meaning privilege/ freedom. In middle ages a franchise was a privilege/ a right.
Essentially a marketing concept, Franchising is an innovative method of distributing goods and services.
What is Franchising?
Legal definition of Franchise:
Black’s Law Dictionary 7 th edition 1999 defines Franchise as, “the sole right granted by the owner of a trademark or trade name to engage in business or to sell a good or service in certain area.”
Definition by International Franchise Association “ A franchise operation is a contractual relationship between the franchisor and franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee operates under a common trade name, format and/or procedure owned or controlled by the franchisor, and in which the franchisee has or will make a substantial capital investment in his business from his own resources.” - Definition by International Franchise Association
TYPES OF FRANCHISE
Three main types of franchise:
Product distribution franchise;
Business format franchise; and
PRODUCT DISTRIBUTION FRANCHISES
A product distribution franchise model is very much like a supplier-dealer relationship.
Typically, the franchisee merely sells the franchisor’s products. However, this type of franchise will also include some form of integration of the business activities.
PRODUCT DISTRIBUTION FRANCHISES
Examples of famous product distribution franchise:
BUSINESS FORMAT FRANCHISING
In a business format franchise, the integration of the business is more complete.
The franchisee not only distributes the franchisor’s products and services under the franchisor’s trade mark, but also implements the franchisor’s format and procedure of conducting the business.
A form of service agreement.
The franchisee provides the management expertise, format and/or procedure for conducting the business.
Regulated by contract which usually covers:
Royalty fee/Management fee
Capital required from franchisee
Territory/Area of operation
Duration of license and renewal
CAREFUL THINGS IN FRANCHISING
The franchisee is not completely independent.
In addition to the initial franchise fee, franchisee must pay ongoing royalties and advertising fees.
Franchisee must be able to balance restrictions and support provided by the franchisor with their own ability to manage the business
A damaged image or franchise system can result if other franchisees perform poorly or the franchisor has financial problems.
The duration of a franchise is usually limited and the franchisee may have little or no say concerning termination
Advantages OF FRANCHISING
Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
You can use a recognized brand name and trade marks. You benefit from any advertising or promotion by the owner of the franchise - the 'franchisor'.
The franchisor gives you support - usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same territory.
Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
You benefit from communicating and sharing ideas with and receiving support from other franchisees in the network
Relationships with suppliers have already been established.
Disadvantages OF FRANCHISING
Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor.
The franchise agreement usually includes restrictions on how you run the business. You might not be able to make changes to suit your local market.
The franchisor might go out of business.
Other franchisees could give the brand a bad reputation.
You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.
All profits are shared with the franchisor
Indian Judgments Impacting Franchising
Reasonableness of Non-Compete Clause
Gujarat Bottling Co. (GBC) & Ors. Vs. Coca Cola Co. & Ors.
Agreement signed for grant of franchise by Coca Cola to GBC to manufacture, bottle, sell & distribute various beverages for which TMs were acquired by Coca Cola.
Agreement’s negative stipulation required GBC to work vigorously & diligently to promote & solicit sale of beverages produced under the TMs owned of Coca Cola Co.
Shares of GCB were transferred to Pepsi, a rival of Coca Cola.
Coca Cola obtained an order of injunction from High Court restraining the transfer of shares from GBC to Pepsi.
Protection of Confidential Information
V.V. Sivaram & Ors. Vs. Foseco India Ltd. (FIL)
Defendants 1 & 2, were ex-employees of FIL & had access to confidential & detailed info. about “Turbostop” (T), a patented product of FIL;
FIL bound them with contractual obligation of non-use of confidential info. acquired in course of employment & by a non-compete obligation;
Defendant 3, a contractor of FIL had access to confidential info. about T & was bound by a confidentiality & non-compete contract. All 3 violated contractual obligations. Court granted order of temporary injunction against them.
Breach of Consumer Rights by Franchisor:
MacDonald’s (Mac) French Fries Case in USA:
A class action lawsuit brought against Mac by group of hindus, vegetarians & kosher observers from USA.
During 1990, Mac advised its vegetarian customers that its “French Fries” contained no meat but in 1997, shortly after Wendy’s was sued for allegedly misrepresenting its food as veg., Mac reversed its stance & began advising public that its fries actually contained a beef product: “beef tallow”.
The court ordered Mac to pay damages of 10 Million US$ and was also asked to issue an apology.