Establish Statutory Agreements
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505_Form_Drafting_Guide_LetterHead.docx
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Massie, Raymond 7/3/2019 For Educational Use Only |
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§ 50:5.Form drafting guide, 4A Am. Jur. Legal Forms 2d § 50:5 |
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Massie, Raymond 7/3/2019 For Educational Use Only |
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§ 50:5.Form drafting guide, 4A Am. Jur. Legal Forms 2d § 50:5 |
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© 2019 Thomson Reuters. No claim to original U.S. Government Works. |
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4A Am. Jur. Legal Forms 2d § 50:5
American Jurisprudence Legal Forms 2d | May 2019 Update
Chapter 50. Business Franchises
II. Basic Franchise Agreements
§ 50:5. Form drafting guide
A franchise agreement should, of course, be in writing, and must be carefully drafted so as not to violate federal and state business regulation statutes, such as antitrust laws.2
The so-called “exclusivity clause” in a franchise agreement is intended to control the degree of protection to a franchisee from competition resulting from the grant of another franchise, or competition from an outlet owned and operated by the franchisor. One method of creating complete exclusivity is to define the franchisee’s area geographically. If this technique is used, the boundaries should be designated by name and the franchise area should be designated on a map attached to the agreement as an exhibit.
Caution:
A geographical definition of a franchise territory poses a danger to the franchisor in that the franchisee may be unable to meet future consumer demands resulting from increased population within the geographic territory. Open-ended exclusivity clauses are used to alleviate this danger. One such type of open-ended clause may be created by basing the franchise territory upon both a fixed population number and a geographic area.
The term “package clause” refers to language in the franchise agreement designating the services provided by the franchisor in setting up the franchisee’s business. The extent of such services by the franchisor depends in large part on the type of franchise. For example, a prepared food franchise system may have a distinctive store design and special types of equipment that the franchisor will provide for the franchisee.
Counsel should take care to avoid antitrust violations when drafting the package clause. A package clause, in specifying the use of distinctive equipment by the franchisee, must not go further in its specification than is reasonably necessary to insure the integrity and quality of the product.3
The product control provisions of a franchise agreement are designed to insure the quality and standardization of the product through such devices as requiring the franchisee to purchase specially formulated products, ingredients, supplies, and merchandise. The type and extent of control will vary according to the particular franchise.
The main problem involved when preparing product control provisions is the avoidance of antitrust violations that arise from improper tie-ins. A tying or tie-in arrangement is an agreement by a party to sell one product but only on condition that the buyer also purchase a different, or tied, product, or at least agree that it will not purchase that product from any other supplier. Courts traditionally have shown a willingness to invalidate tying arrangements established by a franchise agreement if (1) the franchisor has sufficient power in the tying product market, (2) the amount of commerce affected is not insubstantial, and (3) less burdensome alternatives exist. Except where special circumstances and conditions justify such arrangements, tying arrangements are illegal because they lessen competition in the tied product and facilitate price discrimination.4
Such unlawful tying arrangements may be avoided by drafting the product control clause so that the franchisee may purchase products from the franchisor or from an alternate source whose products comply with reasonable standards of the franchisor. It should be noted, however, that an otherwise illegal tying arrangement may be justified as a necessary device for quality control or protection of goodwill or is necessary to develop an infant industry. A claim of business justification for what would otherwise be an illegal tying arrangement also is available as a defense.5
Franchise agreements usually include details concerning numerous means of and grounds for termination. It is essential to the avoidance of costly litigation to spell out clearly and concisely the grounds on which either party may terminate, and the consequences that flow from such termination.6 Federal and state statutes should be consulted to determine particular requirements of termination. For example, state statutes usually require the franchisor to give the franchisee notice of termination.7
Tax Note:
Federal tax aspects of franchise agreements should be carefully considered in the preparation of such agreements.8
Westlaw. © 2019 Thomson Reuters. No Claim to Orig. U.S. Govt. Works.
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Footnotes
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1
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Legal Encyclopedias Private franchise contracts, generally. Am. Jur. 2d, Private Franchise Contracts §§ 1 et seq.
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2
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Legal Encyclopedias Federal and state regulation of franchise agreements. Am. Jur. 2d, Private Franchise Contracts §§ 23 et seq.
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3
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Engbrecht v. Dairy Queen Co. of Mexico, Mo., 203 F. Supp. 714 (D. Kan. 1962) (franchise agreement which required use of franchisor’s particular freezers and food formulas, and prohibited use of name “Dairy Queen” in connection with any product other than products of Dairy Queen freezers, as well as requiring franchisee to dispense products in paper cups and other containers having imprinted Dairy Queen design, held lawful as not in conflict with Section 3 of the Clayton Act, not violative of Section 1 of the Sherman Antitrust Act, and not an unreasonable restraint of trade at common law).
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4
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Legal Encyclopedias Tying arrangements in franchise agreements. Am. Jur. 2d, Private Franchise Contracts §§ 84 et seq.
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5
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Legal Encyclopedias Defenses to illegal tying arrangement claim. Am. Jur. 2d, Private Franchise Contracts §§ 115 to 117.
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6
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Legal Encyclopedias Termination or nonrenewal of private business franchise. Am. Jur. 2d, Private Franchise Contracts §§ 299 et seq.
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7
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Legal Encyclopedias Statutory requirements of notice of termination and opportunity to cure. Am. Jur. 2d, Private Franchise Contracts § 316.
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8
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For a discussion of federal tax statutes, regulations, and court decisions concerning franchise agreements, see Federal Tax Guide to Legal Forms §§ 10:15 et seq.
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End of Document
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© 2019 Thomson Reuters. No claim to original U.S. Government Works.
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