The Franchise Agreement (Part two of a series)

Business Law Notes

Spring 2004 Edition


BUYING A FRANCHISE (Part two of a series)

By M. Blen Gee, Jr.

If you have completed a thorough business analysis of a franchising opportunity, then you are ready to take the next step. What are the major legal issues concerning the franchise and how do they relate to what you have already learned? The Uniform Franchise Offering Circular (UFOC) is one of the major legal issues of concern to a prospective franchisee. The Federal Trade Commission (FTC) requires certain specific disclosures by a franchisor prior to the sale a franchise. Approximately 18 states (but not North Carolina) have specific disclosure or registration requirements as well. The UFOC is a uniform disclosure document developed as an attempt to meet both federal and state disclosure requirements. A properly prepared UFOC will satisfy the FTC requirements and this is typically what is received by prospective franchisees. Some of the key disclosures that are required are:

  • The business experience of the franchisor’s officers and directors over the previous five years.
  • The business experience of the franchisor
  • Certain criminal convictions of officers or directors.
  • Lawsuits and administrative proceedings against the Company that have resulted in a judgment or settlement.
  • Bankruptcies of officers and directors.
  • Initial and recurring fees.
  • Any requirement that goods or services to be purchased from affiliated companies
  • A description of leases, services and products that the franchisee must purchase.
  • Limitations on customers, territory, or the goods and services that can be provided.
  • Territorial protections.
  • Financial information about the franchisor.
  • Earnings claims, if any.

A thorough reading and understanding of the UFOC is essential. Discuss any and all questions you have about the UFOC with your business attorney or your accountant.

>> Read part three of our series on Buying a Franchise

The Lighter Side of Employment Law: Being”Blonde”or “Southern” Is Not Protected by Title VII

Employment discrimination laws prohibit the termination of employees on protected characteristics. In two recent federal court decisions demonstrate, however, employees raised interesting issues. In one, a female employee sued her employer for “blonde” harassment; in another, the employee sued for harassment based on her southern accent.

The courts saw little humor and dismissed these cases.


By Jean Winborne Boyles and M. Blen Gee, Jr.

You have just shipped off several thousand dollars worth of merchandise to a customer on 30 days net credit terms and a few days later you learn that the customer is on the verge of filing bankruptcy. Is there anything that you can do? Surprisingly, yes, but INSTANT ACTION IS REQUIRED!

Under § 2-707 of the Uniform Commercial Code and § 546 of the United States Bankruptcy Code, you can demand in writing immediate return of the goods that you have just shipped. You must do this within 10 DAYS after your customer RECEIVES the goods.

If you make a timely and proper demand for reclamation of your goods, you may be able to substantially increase your recovery in bankruptcy. You may actually be allowed to repossess your goods. More likely, however, you will be granted a “lien” on debtor assets equal to the value of your goods or an “administrative priority.” In either case you will probably receive close to the full value of your goods. If you delay ten days after delivery of the goods to your creditor before you make your demand, you can expect to receive little or nothing in the bankruptcy proceeding since you will then be considered an unsecured creditor.

Here are the things that you need to do:

  • Send a letter to your customer. Use the form below as a guide.
  • The goods that you want to reclaim should be carefully identified.
  • Use multiple methods of communication (i.e., fax, overnight service, certified mail, and e-mail.) Your demand for reclamation is probably effective as of the time that you send it rather than when the customer receives it. However, the case law is not clear and you should not take chances.
  • If the customer has more than one address (for example local office and corporate office) send it to multiple addresses.
  • Carefully retain documentation of the giving of notice (i.e., fax cover sheet, return-receipt for certified mail, overnight delivery service documentation.) Some overnight delivery services will give you documentation of receipt similar to certified mail.
  • You will want to contact a lawyer to make sure that you’ve done everything right and to pursue collection. However, if you cannot speak to your lawyer immediately, you should not wait before sending your notice.


About our Authors:

M. Blen Gee, Jr. is an honors graduate of the University of North Carolina School of Law. His areas of concentration include business and corporate law, including sales of businesses; business litigation, including arbitration and mediation; franchise law; automobile dealer law; and insurance company insolvency. Mr. Gee has earned the highest peer-review rating for professional excellence and ethical standards by the national publication Martindale Hubbell.

Jean Winborne Boyles concentrates her practice in health law, corporate law, bankruptcy and creditors’ rights, commercial leasing, antitrust and state administrative law.

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