Also known as:franchise · franchises · franchised · franchising · grant a franchise
Written by attorneys — see sources below.
To confer upon another the right to operate under a brand or exercise specified powers. The grant may be pledged or mortgaged as security for corporate obligations.
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How its tested
Common Examples
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Pledging Franchise Rights
Foster Forge borrowed funds to expand its manufacturing line. To secure the loan the corporation franchised several retail outlets to local operators and pledged the resulting franchise rights as collateral under its corporate powers.
Franchise Contract Dispute
Burger King franchised a restaurant location to Rudzewicz in Michigan. When the franchisee refused to pay royalties the franchisor sued in Florida and the court examined whether the franchise relationship created sufficient minimum contacts for personal jurisdiction.
Burger King Corp. v. Rudzewicz471 U.S. 462, 474 (1985)
In 1978 John Rudzewicz, a Michigan resident and senior partner in a Detroit accounting firm, was approached by Brian MacShara about jointly applying for a Burger King franchise in the Detroit area. They submitted their application to Burger King’s Birmingham, Michigan district office, which forwarded it to the company’s Miami headquarters.
During the ensuing four months Rudzewicz and MacShara negotiated with both the Birmingham district office and Miami headquarters over site-development fees, building design, computation of monthly rent, and assignment of liabilities. With some misgivings they obtained limited concessions from the Miami headquarters, signed the final agreements, and commenced operations in June 1979 for the Drayton Plains facility. The agreements stated that the franchise relationship was established in Miami and governed by Florida law, required all royalty, advertising, and rent payments to be sent to Miami, and obligated Rudzewicz to attend training in Miami. MacShara completed the training course there and the franchisees purchased $165,000 in equipment from Burger King’s Miami division.
The Drayton Plains restaurant enjoyed steady business during the summer of 1979 but patronage declined after a recession began later that year. Rudzewicz and MacShara fell far behind on their monthly payments to Miami. Burger King headquarters sent notices of default and conducted prolonged negotiations by mail and telephone with the franchisees, but the negotiations failed and headquarters terminated the franchise. Rudzewicz and MacShara refused to vacate and continued to operate the facility as a Burger King restaurant.
Burger King commenced suit in the United States District Court for the Southern District of Florida in May 1981. It invoked diversity and federal trademark jurisdiction. Burger King alleged breach of the franchise agreements by failure to make required payments in Miami together with trademark infringement. The district court denied Rudzewicz’s motion to dismiss for lack of personal jurisdiction, conducted a three-day bench trial, entered judgment against Rudzewicz and MacShara jointly and severally for $228,875 in contract damages, ordered them to close the restaurant or surrender possession, and awarded costs and attorney’s fees. Rudzewicz appealed to the Court of Appeals for the Eleventh Circuit, which reversed on the ground that the circumstances left Rudzewicz without reasonable notice of suit in Florida. The Supreme Court granted certiorari to review the jurisdictional ruling.
A city ordinance restricted the ability of corporations to franchise new retail outlets. The court assessed whether the restriction incorporated fundamental rights against the states through the Fourteenth Amendment.
McDonald v. City of Chicago, Illinois561 U.S. 742 (2010)
In 2008, the Supreme Court decided District of Columbia v. Heller. The Court held that the Second Amendment protects the right to keep and bear arms for self-defense. It struck down a District of Columbia law that banned handgun possession in the home.
Chicago and the village of Oak Park maintained laws effectively banning handgun possession by almost all private citizens. Chicago's Municipal Code required a valid registration certificate for any firearm. It prohibited registration of most handguns. Oak Park made it unlawful to possess any firearm, including pistols, revolvers, and other handguns.
Otis McDonald, Adam Orlov, Colleen Lawson, and David Lawson were Chicago residents. Along with the National Rifle Association and two Oak Park residents, they filed federal suits challenging these ordinances after the Heller decision. Chicago enacted its handgun ban in 1982 to protect residents from loss of property and injury or death from firearms. The petitioners argued that the bans left them vulnerable to criminals. They pointed to Chicago Police Department statistics showing that the city's handgun murder rate had increased since the ban. Chicago residents faced one of the highest murder rates in the country along with elevated rates of other violent crimes.
Several petitioners had personal experiences with threats and violence. Otis McDonald, in his late seventies and living in a high-crime neighborhood, faced violent threats from drug dealers because of his community activism with alternative policing strategies. Colleen Lawson's home had been targeted by burglars. She believed possessing a handgun would decrease her chances of serious injury or death if threatened again.
The Chicago petitioners and two groups filed suit in the United States District Court for the Northern District of Illinois. They sought a declaration that the handgun ban and related ordinances violated the Second and Fourteenth Amendments. A separate action challenged the Oak Park law. A third action also challenged the Chicago ordinances. All three cases were assigned to the same district judge. The District Court rejected the claims. It noted that the Seventh Circuit had upheld a handgun ban a quarter century earlier. It also noted that Heller had refrained from addressing whether the Second Amendment applied to the States. The Seventh Circuit affirmed. It relied on three nineteenth-century cases—United States v. Cruikshank, Presser v. Illinois, and Miller v. Texas—that had been decided after the Slaughter-House Cases. The Supreme Court granted certiorari.
A utility company franchised service territories and then advertised the benefits. The commission banned promotional ads and the court evaluated whether the ban violated commercial speech protections under the First Amendment.
Central Hudson Gas & Electric Corp. v. Public Service Commission of New York447 U.S. 557, 100 S. Ct. 2343, 65 L. Ed. 2d 341 (1980)
In December 1973, the Public Service Commission ordered electric utilities in New York State to cease all advertising that promoted the use of electricity because the interconnected utility system lacked sufficient fuel stocks for the 1973-1974 winter. The order rested on the Commission's finding that the system did not have sufficient fuel stocks or sources of supply to meet customer demands.
Three years later, when the fuel shortage had eased, the Commission requested comments from the public on its proposal to continue the ban on promotional advertising. Central Hudson Gas & Electric Corp. opposed the ban on First Amendment grounds. After reviewing the public comments, the Commission extended the prohibition in a Policy Statement issued on February 25, 1977.
The Policy Statement divided advertising expenses into promotional and institutional categories. It permitted informational advertising designed to encourage shifts of consumption from peak demand times to periods of low electricity demand. The Commission banned promotional advertising because additional electricity would be more expensive to produce and promotional advertising would give misleading signals to the public. Central Hudson challenged the order in state court. The order was upheld through the New York Court of Appeals. The Supreme Court noted probable jurisdiction and reversed.
A juvenile was accused of operating an unlicensed franchise business. The court required proof beyond a reasonable doubt that the accused had franchised the operation before imposing liability.
In re Winship397 U.S. 358, 364, 90 S.Ct. 1068, 1073, 25 L.Ed.2d 368 (1970)
During a 1967 adjudicatory hearing conducted pursuant to section 742 of the New York Family Court Act, a judge in New York Family Court found that the twelve-year-old appellant had entered a locker and stolen one hundred twelve dollars from a woman's pocketbook. The petition which charged appellant with delinquency alleged that his act, if done by an adult, would constitute the crime or crimes of larceny. The judge acknowledged that the proof might not establish guilt beyond a reasonable doubt but relied on section 744(b) of the New York Family Court Act, which provides that any determination at the conclusion of an adjudicatory hearing that a juvenile did an act or acts must be based on a preponderance of the evidence.
After a subsequent dispositional hearing, appellant was ordered placed in a training school for an initial period of eighteen months, subject to annual extensions of his commitment until his eighteenth birthday, six years in appellant's case. The Appellate Division of the New York Supreme Court, First Judicial Department, affirmed without opinion. The New York Court of Appeals then affirmed by a four-to-three vote, expressly sustaining the constitutionality of section 744(b). The Supreme Court noted probable jurisdiction.
A state limited voting rights in elections that affected local franchise holders. The court determined whether the apportionment claim presented a justiciable controversy under the Equal Protection Clause.
Baker v. Carr369 U.S. 186, 211
In 1901 the Tennessee General Assembly enacted a statute apportioning the Senate with thirty-three members and the House of Representatives with ninety-nine members among the state's ninety-five counties.
The Tennessee Constitution required a decennial enumeration of qualified voters and reapportionment of both houses on that basis. The General Assembly performed reapportionments after the enumerations of 1871, 1881, and 1891. After 1901 every proposal for reapportionment failed to pass.
Between 1901 and 1960 the state's population grew from 2,020,616 to 3,567,089. The number of persons eligible to vote rose from 487,380 to 2,092,891. Substantial redistribution occurred from rural to urban counties.
Appellants were residents and qualified voters of the urban counties of Davidson, Hamilton, Knox, Montgomery, and Shelby. They brought a civil action in the United States District Court for the Middle District of Tennessee against the Secretary of State, Attorney General, Coordinator of Elections, and members of the State Board of Elections. The complaint was filed under 42 U.S.C. §§ 1983 and 1988. It alleged that continued application of the 1901 statute debased their votes and denied equal protection of the laws. The complaint sought a declaratory judgment that the statute was unconstitutional. It also sought an injunction against conducting further elections under the statute. Alternative relief included at-large elections or a court-ordered reapportionment.
A three-judge district court convened under 28 U.S.C. § 2281 dismissed the complaint. The court held that it lacked jurisdiction of the subject matter and that the complaint failed to state a claim upon which relief could be granted. The court characterized the controversy as a nonjusticiable political question. The Supreme Court noted probable jurisdiction. The case was argued in April 1961, set for reargument, reargued in October 1961, and decided on March 26, 1962.
What corporate power allows a company to pledge its franchise rights?
Model Business Corporation Act section 3.02(g) expressly authorizes a corporation to secure its obligations by mortgage or pledge of any of its property, franchises, or income.
Does franchising a business create minimum contacts for personal jurisdiction?
A franchise relationship that involves ongoing contractual obligations and payments to an out-of-state franchisor can establish sufficient minimum contacts for jurisdiction in the franchisor's home state.
How does the beyond-a-reasonable-doubt standard apply when a franchise operation is at issue in a criminal case?
The prosecution must prove every element, including that the defendant franchised the unlawful activity, beyond a reasonable doubt before a conviction may stand.
397 U.S. 358, 90 S. Ct. 1068, 25 L. Ed. 2d 368 (1970)
…reinforced and confirmed these basic freedoms. In 1350 a statute declared that "it is contained in the Great Charter of the Franchises of England, that none shall be imprisoned nor put out of his Freehold, nor of his Franchises nor free Custom, unless it be by the Law of the Land . . . ." Four years later another…