CFC Franchise Agreements & Contract Law 1 — Questions and Answers
Question 1: In a franchise agreement, what does the 'grant clause' primarily establish?
- The royalty payment schedule
- The franchisee's right to operate using the franchisor's system and marks (Correct answer)
- The territory boundaries for the franchise
- The training obligations of the franchisor
Correct answer: The franchisee's right to operate using the franchisor's system and marks
The grant clause establishes the franchisee's right to use the franchisor's trademarks, system, and methods to operate the franchise business.
Question 2: Which federal regulation requires franchisors to provide a Franchise Disclosure Document (FDD) to prospective franchisees?
- The Uniform Commercial Code (UCC)
- The FTC Franchise Rule (Correct answer)
- The Sherman Antitrust Act
- The Small Business Administration Lending Guidelines
Correct answer: The FTC Franchise Rule
The FTC Franchise Rule mandates that franchisors provide an FDD to prospective franchisees at least 14 calendar days before any agreement is signed or money is paid.
Question 3: What is the primary purpose of a 'non-compete' clause in a franchise agreement?
- To prevent the franchisor from opening competing locations in the franchisee's territory
- To restrict the franchisee from operating similar businesses during and after the franchise term (Correct answer)
- To prohibit the franchisee from hiring employees from competing businesses
- To prevent suppliers from selling to competing franchise systems
Correct answer: To restrict the franchisee from operating similar businesses during and after the franchise term
Non-compete clauses protect the franchisor's system by prohibiting the franchisee from operating similar businesses both during the franchise term and for a specified period after termination.
Question 4: What does 'in-term' non-compete refer to in a franchise agreement?
- A restriction that applies only after the franchise agreement expires
- A restriction on competitive activity that applies during the active franchise relationship (Correct answer)
- A clause limiting the number of franchise units a franchisee can operate
- A provision requiring the franchisee to renew the agreement within a specified term
Correct answer: A restriction on competitive activity that applies during the active franchise relationship
An in-term non-compete restricts the franchisee from engaging in competitive business activities while the franchise agreement is currently in effect.
Question 5: What is the primary purpose of a 'transfer fee' in a franchise agreement?
- To compensate the franchisor for lost royalties during the ownership transition
- To cover the franchisor's administrative costs in reviewing and approving a franchise transfer (Correct answer)
- To fund training programs for the incoming franchisee
- To serve as a performance deposit held until the new franchisee meets benchmarks
Correct answer: To cover the franchisor's administrative costs in reviewing and approving a franchise transfer
Transfer fees compensate the franchisor for the administrative costs involved in reviewing, approving, and processing the transfer of a franchise to a new owner.
Question 6: Which type of franchise agreement grants a franchisee the right to develop multiple franchise units within a defined territory over a set period?
- Master franchise agreement
- Area development agreement (Correct answer)
- Sub-franchise agreement
- Unit franchise agreement
Correct answer: Area development agreement
An area development agreement grants a franchisee the right to open and operate multiple units within a specified territory according to a predetermined development schedule.
Question 7: What does 'right of first refusal' mean in the context of a franchise agreement?
- The franchisor's right to refuse any franchisee application without explanation
- The franchisor's right to purchase the franchise before the franchisee can sell it to a third party (Correct answer)
- The franchisee's right to refuse system changes that significantly alter operations
- The right to terminate the agreement if the other party fails to perform first
Correct answer: The franchisor's right to purchase the franchise before the franchisee can sell it to a third party
Right of first refusal gives the franchisor the option to purchase the franchise unit under the same terms offered by a prospective buyer before the franchisee can complete a sale to a third party.
CFC Franchise Agreements & Contract Law 1
In a franchise agreement, what does the 'grant clause' primarily establish?