Wilma has set up a new business entity, which she’s incorporated, to operate a restaurant in her town of Springfield. It’s called Burger Daddy of Springfield, Inc. (BDSI), but it is not a freestanding, self-contained entity. It is a franchise, doing business under license from a national umbrella operation called Burger Daddy National, Inc. (“National”). National does not itself own any restaurants or indeed much in the way of any physical assets. Its main asset is the nationally known name “Burger Daddy,” along with other trademarked logos and marketing materials, which it promotes through national advertising campaigns. It licenses these trademarks to tens of thousands of separately organized franchisees nationwide, and they in turn own and operate the physical restaurants where the burgers are sold. National’s licensing agreements are long, complex, and heavily lawyered documents. On the one hand, they set a number of specific rules that franchisees must follow in their operation of their restaurants, to prevent misuse of the trademark, and to maintain quality standards in the food products, cleanliness of stores, and customer service. But on the other hand, they disclaim the creation of any legal relationship between National and the franchisees other than arm’s-length contract. First, what is the basic tension that National’s licensing contracts try to navigate with restrictions on franchisees, on the one hand, but disclaimers of agency or partnership, on the other? Here’s a harder, more open-ended question: Why sell burgers through franchisees—as most fast-food businesses do? Why doesn’t National just own the restaurants directly? What are the pros and cons? • Suppose that you represent a small bank that is considering making a loan to a struggling operator of a local grain elevator. The prospective lender believes the elevator is important to the local economy, but is concerned with some of the business judgments the operator recently has made. What steps can the lender take to protect itself (other than forgo the loan)? What must it avoid?
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