Harold Brown, Franchising - A Fiduciary Relationship, (1971) .

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FRANCHISING-A FIDUCIARY RELATIONSHIP
HAROLD BROWN*
Franchising---"the last frontier of the independent business-

man"-presents one of the nation's newest legal frontiers.
The author argues that the courts must recognize the poten-
tial abuses inherent in most franchisingarrangementsand de-
vise new legal rules to require that franchisors maintain a
system protecting the franchisee'seconomic integrity as an in-
dependent businessman and offering him a reasonableoppor-
tunity to succeed.
Although franchising had its inception over a century ago when

the brewers licensed beer gardens for distribution purposes, only
since World War II and more specifically in the past ten years has
franchising achieved recognition as a distinct method of marketing.
Moreover, while franchising now accounts for approximately ninety
billion dollars in annual sales, ten percent of the Gross National
Product and twenty-five percent of all retail sales, "franchise" is still
defined in Corpus Juris Secundum only as "the right to vote." 1 It is,
therefore, not surprising that counsel for franchisees are confronted
with state remedies that have just begun to develop 2 and federal
regulation that applies only collaterally. Other than the Auto Dealer's
Act,3 itself of limited utility,4 franchise legislation is generally lacking
Member of the Massachusetts Bar. BA., 1936, Yale University; LL.B., 1939, LL.M.,
1940, Harvard University.
1 37 C.J.S. Franchise § 1 (1943).
2 CAL. Bus. & PROF. CODE § 10 (West Supp. 1971); CAL. CoRa'. CODE §§ 25019, 25212,
31000-19 (West Supp. 1971); 57 Laws of Del. ch. 693 (1970) (prohibiting terminations or
failures to renew "without good cause" or "in bad faith'). In Puerto Rico a damage
action was created for termination of a franchise "without just cause." P.R. LAws ANN.
tit. 10, § 278a (Supp. 2A, 1969). This phraseology is of civil law origin and expresses a
concept akin to the common-law notion of good faith. The statute was held unconstitu-
tional as to retroactive application, but the Supreme Court reversed, holding that absten-
tion was proper until the meaning of "just cause" had been construed by the Supreme
Court of Puerto Rico. Fornaris v. Ridge Tool Co., 423 F.2d 563 (1st Cir.), rev'd 400 U.S. 41
(1970).
A number of states have enacted bills for the protection of auto dealers. E.g., MAss.
ANN. LAWS ch. 93B (Advance Supp. 1970). For a commentary on this statute see Brown,
A Bill of Rights for Auto Dealers, 12 B.C. IND. & CoM. L. REv. 756 (1971). Other states,
including New York, Virginia, and Texas, are actively considering franchise control
legislation. See, e.g., Tex. H.R. 709, 62d Legis., Reg. Sess. § 4 (1971) (proposed Texas Fran-
chise Ass'n Act); Tex. H.R. 710, 62d Legis., Reg. Sess. § 13(b) (proposed Texas Franchise
Inv. & Ass'n Act). Both of the proposed Texas statutes require full disclosure to prospective
franchisees and recognize mutual fiduciary duties between franchisees and franchisors.
3 15 U.S.C. §§ 1221-25 (1964).
4 H. BROWN, FRANCHISING: TRAP FOR THE TRUSTING 77-86; H. BROWN, THE REALirrEs
OF FRANCHISING 117-21 (1970).
FRANCHISING AND EQUITY 651
although numerous measures are pending in Congress5 and the states.6
Furthermore, there are few reported decisions on the law of franchising,
treatises are nonexistent, and law review coverage is scarce. 7 It is
submitted that this massive industry, rampant with existing and po-
tential abuses and virtually unregulated by statutory or common law,
presents a unique opportunity for a classical exercise of the king's
conscience.
Franchising has been aptly described by Senator Philip A. Hart

as "a preferred method of distribution by companies of all sizes," pro-
viding "an easy and efficient distribution system at little cost and with
little of the irritations and responsibilities of an integrated system." 8
Others have called franchising the last frontier of the independent
businessman, noting its inherent appeal to the 185,000 annual retirees
from the armed services, the twelve percent of the population whose
black heritage has prevented their meaningful participation in the
mainstream of business,9 and millions of ordinary citizens-"Mom and
Pop"-whose life savings of 5,000 to 25,000 dollars are available to
acquire their own business. The newest group to which franchising has
been offered as a financial panacea is the American Indian, who is
sponsored with equity funds provided by the Bureau of Indian Af-
fairs. 10
Powerful lobbies of organizations such as the International Fran-
chise Association have contended that the principal complaints against
5 Senator Hart's proposed Fairness in Franchising Act, originally introduced in 1967
and reintroduced in 1969, was rejected by the Senate Judiciary Committee. S. 1967, 91st
Cong., 1st Sess. (1969); S. 2321, 89th Cong., 1st Sess. (1967). Senator Williams' proposed
Franchise Full Disclosure Act is stalled in committee with low priority. S. 3844, 91st
Cong., 2d Sess. (1970). The Select Committee on Small Business of the Senate recommended
enactment of Senator Williams' bill. In addition, the Committee recommended giving the
Federal Trade Commission (FTC) power to seek preliminary injunctive relief against
unfair and deceptive franchise practices, hold hearings on franchisor buy-backs, and draft
a franchising code of ethics. S. REP'. No. 91-1344, 91st Cong., 2d Sess. 3-5 (1970).
6The Massachusetts Franchise Fair Dealing Act drafted by this author, originally
proposed in 1970, Mass. H. 2279 (1970), has been reintroduced in substantially the same
form for 1971. Mass. S. 110 (1971). The bill is set forth in H. BROWN, FRANCHISING: TRAP
FOR THE TRUSTING 160-77 (1969) [This work was published in a "second printing." Page
citations in this article are to this printing, which has different pagination from the first
printing.].
7 See generally ABA ANTITRUST SECTION, ANTrrRus'r DEvELovmENTs 1955-1968 (1968);
H. BROWN, FRANCHISING: TRAP FOR THE TRUSTING (1969); H. BROWN, THE REALITIEs OF
FRANCHISING (1970); NEW ENGLAND ANTITRUST CONFERENCE, A PRIMER ON UNLAWFUL
RESTRAINTS IN MARETNG AND DISTRIBUTION (1967); PRACTICING LAW INSTITUTE, FRANCHIsING
SOURCEBOOK (1970); PRACTICING LAW INSTITUTE, FRANCHISING-TODAY'S LEGAL AND BUSINESS
PROBLEMS (1970); J. VAN CISE, UNDERSTANDING THE ANTITRUST LAWS (rev. ed. 1970).
8 H. BROWN, supra note 6, at v (foreword by Senator Philip A. Hart).
9 Korot, Making FranchisesAvailable to Ghetto Businessmen, 25 Bus. wAw.
91 (1970);
Sayre, Franchisingin the Ghetto, 25 Bus. LAW. 73 (1970).
10 See CONTINENTAL FRANCHISE REV., Oct. 5, 1970, at 5.
TEXAS LAW REVIEW [V7ol. 49:650
franchising concern practices that have now been abandoned or that
emanate from the criminal fringe found in any business community."
Current franchising abuses, they argue, can usually be dealt with
under existing criminal laws against fraud, including use of the mail
to defraud. 12 Clearly, some abuses are perpetrated by criminal ele-
ments. Consider for instance the North Carolina franchisee who paid
90,000 dollars in cash to a Wisconsin franchisor for the "exclusive
territorial rights" to grow and sell Christmas trees in Virginia, or the
Ohio engineer who gave up his job to invest 12,000 dollars in a "suc-
cess motivation" franchise, but found himself totally deficient in the
very product he was supposed to sell to others. 13 Or take the case of the
Indiana businessman who sold his home to invest 12,000 dollars in a
"turnkey"14 computer academy in Arizona. He spent months unable
to obtain fulfillment of the franchisor's promised aid and after receiving
his permission to move the franchise to California was informed that
"it's a new ball game"-that the franchisor would not provide any
support for purchase, lease, or financing of the "turnkey" facility.
Each of these franchisees lost every cent and was thoroughly demoral-
ized. 15 Although there has been an increasing number of federal
prosecutions for mail fraud and although the FTC has sought to en-
join deceptive sales tactics, neither of these remedies offers restitution
for the thousands of franchisees who have lost their life savings in
16
fraudulent investments.
11 Hearings on the Impact of Franchisingon Small Business Before the Subcomm. on
Urban and Rural Economic Development of the Senate Select Comm. on Small Business,
91st Cong., 2d Sess. 143 (1970) (statement of Philip F. Zeidman, Washington Counsel, Inter-
national Franchise Association).
12 18 U.S.C. § 1341 (1964).
13 See Success Motivation Institute, Inc., 3 TRAnE REG. RE'. 19,306, at 21,468 (FTC
1970).
14 In a "turnkey" franchise, the franchisor undertakes to provide a complete business
package, ready for the franchisee to start operations.
15 Although no statistics are available, the traumatic consequences of business failures
among franchisees seem to be far worse than in the case of other businessmen. The impact
of the inordinate working hours over a long period, of the financial loss of their "nest
egg" by those uninitiated in the risks of venture capital, and of the betrayal of the
faith that inexperienced franchisees are induced to repose in the franchisor can wreak
havoc. This writer has incidentally noted the extremely high rate of broken homes among
the hundreds of complaints received since publication of his book. H. BROWN, supra note
6. Generally franchisees are in their middle years, come from a sheltered existence, and
appear to be totally unprepared for a violent change in their life pattern-numerous
franchisors have stated that their franchisees are like children, demanding constant
discipline and control. Franchising may well warrant analysis by psychologists. For a
discussion of the psychological effect of the ever-present threat of termination see J. Cuasy,
PARTNERS FOR PROFrr (1966).
16 Although fraud in the sale of franchises is not an essential part of this discussion,
that problem is evident from the record of "thousands of people . . . being bilked of
hundreds of thousands of dollars by glib salesmen and misleading literature selling
worthless franchises," including boiler room salesmen driven out of securities sales and
1971] FRANCHISING AND EQUITY
The problem of protecting the franchisee from wrongdoing ex-

tends, however, far beyond criminal elements and the reach of existing
law. It includes large corporations in leading industries,' 7 and neither
criminal process nor common-law actions for fraud or breach of con-
tract provide a remedy for many dealings that are unfair, overbearing,
in bad faith, or even unconscionable; a more effective remedy is
needed. Although many franchising practices sometimes constitute vio-
lations of the antitrust laws' 8 -one suggested remedy-the franchisor-
installment land sales, "turning to selling flimsy franchises in order to reap quick and
easy profits." A more startling conclusion is "that in almost every instance, the franchise
offering literature was either inadequate, misleading, wholly lacking or blatantly false as
to material facts necessary to make an intelligent investment decision." Statement by New
York Attorney General Lefkowitz to Committee on Franchise Licensing of the New York
Legislature, Sept. 28, 1970. See Staff Report on Franchising to New York Attorney General,
Jan. 7, 1970, set forth in H. BROWN, supra note 6, at 191-98; Hearings, supra note 11, at
111-16.
Numerous legislative efforts are pending to require full disclosure in the sale of
franchises. E.g., S. 3844, 91st Cong., 2d Sess. (1970); Mass. H. 2279 (1970). A measure to
require disclosure recently was enacted in California. Note 2 supra. Also, strong argu-
ments have been offered to classify a franchise as an investment contract and therefore a
security under existing security laws. See 49 OPs. CAL. ATtY. GEN. 124 (1967); 1969 Oss.
GA. ATTY. GEN. 661 (1969); Goodwin, Franchising in the Economy: The FranchiseAgree-
ment as a Security Under Securities Acts, Including 10b-5 Considerations, 24 Bus. LAw.
1311 (1969); cf. Mr. Steak, Inc. v. River City Steak, Inc., CCH FED. SEC. L. REP. 92,838
(D. Colo. Sept. 30, 1970).
Moreover, the FTC has recently focused attention on fraud in the sale of franchises.
Century Brick Corp., 3 TRADE RE. REP. 19,391, at 21,516 (FTC 1970); Universal Credit
Acceptance Corp., 8 TRADE REG. REP. 19,340, at 21,479, 19,371, at 21,501 (FTC 1970)
(credit card); Success Motivation Institute, Inc., 3 TRADE REG. R ,. 19,306, at 21,468
(FTC 1970) (academy); Meal or Snack System, Inc., [1967-1968 Transfer Binder] TaRA
REG. 1a. 18,671, at 21,038 (FTC 1969) (fast food). It may well be suggested that the
FTC now use its extensive rulemaking powers rather than litigation to combat fraud in
the sale of franchises. See, e.g., 15 U.S.C. § 46(g) (1964). See also Remarks of L.G. Meyer,
FTC Director of Policy Planning, at Annual International Franchise Association Meeting,
January 21, 1971, set forth in No. 502, pt. I [unbound report letter] TRADE REG. REP. 5
(Jan. 25, 1971), suggesting FTC regulation of required disclosures to prospective fran-
chisees in lieu of statutory disclosure akin to that required by the federal securities laws.
17 Although it has been reported that organized crime is now deeply involved in the
franchising of vending machines, mobile homes, mini-theaters, motels, and restaurants,
Statement by New York Attorney General Lfkowitz, supra note 16, recent legislative
disclosures and litigation against major franchisors indicate the involvement of prominent
corporations in franchise abuses. Goodwin, The Name of the Franchising Game Is: The
Franchise Fee, the Celebrity, or Basic Operations, 25 Bus. LAw. 1403 (1970).
18 Perkins v. Standard Oil Co., 395 U.S. 642 (1969) (liability through several corporate
distribution levels for damages caused by price discrimination); Fortner Enterprises, Inc. v.
United States Steel Corp., 394 U.S. 495 (1969) (extension of credit as a tying product);
FTC v. Texaco, Inc., 393 US. 223 (1968) (use of dominant economic power to encourage
sale of one brand of tires, batteries, and accessories constitutes an unfair method of
competition, even if overt coercive practices are not employed); Perma Life Mufflers, Inc. y.
International Parts Corp., 392 U.S. 134 (1968) (unclean hands no defense); FTC v. Fred
Meyer, Inc., 390 U.S. 341 (1968) (price discrimination plan under which retailers could not
obtain same quantity discounts as wholesaler-retailer); Albrecht v. Herald Co., 890 U.S.
145 (1968) (fixing maximum price as an illegal restraint of trade); United States v. Arnold,
Schwinn & Co., 388 U.S. 365 (1967) (imposition of customer or territorial restraints on
alienation of goods purchased by dealers as per se violation); United States v. Scaly, Inc.,
388 US. 350 (1967) (horizontal and vertical territorial limitations); FTC v. Brown Shoe
Co., 384 U.S. 316 (1966) (incipient violation by major manufacturer in requiring preferen-
tial purchase of its goods by dealers); United States v. General Motors Corp., 384 U.S. 127
(1966) (combination of factory and dealers in restraint of trade); Atlantic Refining Co. v.
TEXAS LAW REVIEW [Vol. 49:650
franchisee relationship should be primarily governed by common or
statutory law in- the same fashion as other business associations. Surely,
it could hardly be suggested that the status of corporations, partner-
ships, and joint ventures should have been left solely to the principles
of contract and fraud. A review of some of the principal complaints
of franchisees in various leading industries should demonstrate an
abiding need for the development of a cohesive body of franchise law.
Complaints against the Big Three auto manufacturers' 9 encompass
operating abuses such as wholly inadequate reimbursement for pre-
delivery and warranty work performed by the dealers, 20 inequitable
delivery of vehicles, forced purchase of unwanted models or vehicles
with excessive accessories, forced participation in nationally advertised
sales without pro rata reduction in the dealer's cost, 2' and forced
purchase at inflated prices of parts, accessories, and supplies, 22 portions
of which are euphemistically referred to as "captured" parts.23 Also,
dealers complain bitterly of the subsidies to leasing companies and fleet
buyers that result when vehicles are sold at hundreds of dollars below
the cost to regular dealers,24 and, perhaps most basically, of finding
FTC, 381 U.S. 357 (1965) (kickbacks obtained from third party vendor of tires, batteries,
and accessories); Klor's, Inc. v. Boadway-Hale Stores, Inc., 359 U.S. 207 (1959) (limited
boycott by wholesaler); Semmes Motors, Inc. v. Ford Motor Co., 429 F.2d 1197 (2d Cir. 1970)
(because of uniqueness of the franchise as an asset, issuance of temporary injunction
against termination of a franchise does not depend on franchisee's demonstration of prob-
able success in obtaining a permanent injunction); Susser v. Carvel Corp., 332 F.2d 505
(2d Cir. 1964), petition for cert. dismissed, 381 U.S. 125 (1965) (franchisor's exclusive supply
arrangement might not be a per se violation when used narrowly to protect trademark);
Siegel v. Chicken Delight, 311 F. Supp. 847 (N.D. Cal. 1970) (franchisor failed to carry
burden of proving that specifications for a substitute for the tied product would be too
complex to be practical); cf. Miller Plymouth Center, Inc. v. Chysler Motors Corp., 286
F. Supp. 529 (D. Mass. 1968).
19 See, e.g., DiCostanzo v. Chrysler Corp., Civil No. 70-3331 (E.D. Pa., Dec. 3, 1970);
Hearings to Determine the Effect of Franchising on Small Businessmen Before the Sub-
comm. on Monopoly of the Senate Select Comm. on Small Business, 91st Cong., 1st Sess.
(1970); Brown, supra note 2.
20FTC, REPORT ON AUroMOILE WARRANTIEs (1968). Increased production of auto-
mobiles, failure of auto manufacturers to reduce the defects in the cars produced, the
shortage of qualified mechanics, and the introduction of the five year/5000 mile warranty
have all combined to place a great burden upon franchised automobile dealers. Id. at
45-68, 83. Dealers also claimed that reimbursement for warranty work and for predelivery
inspections was substantially below actual cost. Id. at 101-21.
21 The FTC has proposed a trade regulation rule to cover new-car-pricing practices
of manufacturers and dealers. No. 488, pt. I [unbound report letter] TRADE Rx. REP. 4
(Oct. 18, 1970).
22 For this type of captive market, prices should be substantially below competitive
prices since a seller does not bear the inventory risks of the ordinary wholesaler. See
FTC v. Texaco, Inc., 393 U.S. 223 (1968) (discussion of comparable problems confronting
the gasoline station dealers vis-A-vis the major oil companies).
28 This probably refers to parts and accessories manufactured by captive suppliers
who apparently contract not to deal directly with the dealers. See Kior's, Inc. v. Broadway-
Hale Stores, Inc., 359 U.S. 207 (1959) (boycott per se violation of antitrust laws).
24 These subsidies may also take the form of cash allowances, advertising contributions,
guaranteed repurchase price, favored treatment in reimbursement for warranty work,
themselves in direct retail competition with stores owned by the

factory or effectively controlled by the factory in spite of a minority
interest owned by an independent dealer.2 5 This competition is preg-
nant with every type of abuse, ranging from price cutting and excessive
advertising to the unlimited capacity to provide better facilities and
inventories of both vehicles and parts, regardless of the effect on "re-
tail" profits. 26 Moreover, the auto manufacturers deny that the dealer
has any goodwill in his business, all such attributions supposedly
emanating from the contributions of scale provided by the factory, in-
cluding design, engineering, manufacturing, marketing, warranty, and
servicing.27 Thus dealers are prohibited from making a charge for
goodwill in the sale of a dealership,2 8 have minimal control over selec-
tion of a successor, and are precluded from capitalizing their businesses
in the many ways available to other businessmen.2 9
In the Nation's second largest industry, the major oil firms have
their gasoline station dealers in virtual bondage, hinged on the con-
stant threat that their short-term contracts will not be renewed unless
they submit to burdensome franchisor-imposed practices.8 0 Although
recommencement of warranty at time of resale, and floor-plan financing when the car is
reacquired. See generally FTC v. Fred Meyer, Inc., 390 U.S. 341 (1968); 15 US.C. § 18(a)
(1964). Although subsidies to leasing companies and fleet buyers have been renounced for
the time being by the Big Three commencing with the 1971 model year, several dealer
antitrust class suits are still pending. On the other hand, several cities, counties, and
states are seeking treble damages and injunctions because of the alleged combination by
the Big Three for resale price maintenance in the renunciation of fleet subsidies. City of
Philadelphia v. General Motors Corp., Civil No. 70-2753 (E.D. Pa., Oct. 7, 1970); City of
New York v. General Motors Corp., Civil No. 70-4245 (S.D.N.Y., filed Sept. 30, 1970).
25 This practice appears of doubtful legality under the antitrust laws. See United
States v. New York Great Atlantic & Pacific Tea Co., 173 F.2d 79, 88 (7th Cir. 1949). The
"fair trade" exemption from the Sherman Act and Robinson-Patman Act is denied in
cases of "dual distribution." 15 U.S.C. §§ 1, 13 (1964).
26 Factory operation of company stores, including subsidizing retail operating losses,
free loan of executives, and advertising allowances could constitute "predatory price-cut-
ting in one locality, subsidized by adventitious resources" and therefore an attempt or
conspiracy to monopolize under § 2 of the Sherman Act, 15 U.S.C. § 2 (1964). Mount
Lebanon Motors, Inc. v. Chrysler Corp., 283 F. Supp. 453, 457-58 (W.D. Pa. 1968), aff'd 417
F.2d 622 (3d Cir. 1969).
27 See Statement by General Motors to Joint Committee on Government Operations
of the Massachusetts Legislature, 1970, in opposition to H. 2279 (Mass. 1970), concluding
that any value given to the dealer's goodwill would constitute a "total windfall."
28 A supposed justification for a manufacturer's refusal to consent to a high price for
the transfer of a dealership is that the transferee's ability to operate successfully, a matter
of appropriate concern to the manufacturer, will be diminished if he is required to expend
too much of his capital on the purchase price. Pierce Ford Sales, Inc. v. Ford Motor Co.,
299 F.2d 425 (2d Cir.), cert. denied, 371 U.S. 829 (1962). This analysis overlooks the
unfairness inherent in depriving the transferor of the value of the goodwill which he
has developed.
29 For an example of remedial legislation see the Massachusetts Motor Vehicle Busi-
ness Practices Act. MAss. ANN. LAws ch. 93B, §§ 4, 9 (Advance Supp. 1970).
aoFTC v. Texaco, Inc., 393 U.S. 223, 226-27 (1968); Atlantic Refining Co. v. FTC
381 U.S. 357, 363-67 (1965); Lee Nat'l Corp. v. Atlantic Richfield Co., 308 F. Supp. 1041
(E.D. Pa.), leave to file petition for cert. denied, 400 U.S. 904 (1970).
one may be shocked to learn that of the 225,000 gasoline station deal-
ers the annual attrition from insolvency, termination, and failure
to renew the dealership ranges from twenty-five to forty percent, this
decimation would appear predictable from the conditions that prevail.
Just prior to World War II, in response to widespread national
and local measures designed to discourage chainstore operations, 31 the
major oil companies adopted the so-called Iowa Plan under which the
company utilized its economic strength to obtain choice sites, con-
structed stations with little regard to their economic viability, and
then leased the premises to dealers on the condition that they handle
the company's gasoline and related products. The proliferation of
these company-leased stations and the preemption of almost all the
good locations has led to the common sight of several stations at every
available intersection with the operators helpless to satisfy the oil
company's drive to obtain a satisfactory return on its unwise invest-
ment. Aside from a high minimum rental, the lease always specifies an
additional rental for each gallon of gasoline sold, thus providing the
lessor with the means to profit from increased sales. Another decade-
old policy, the decision by the majors to forego price competition,
has resulted in competition based on such invalid factors as octane
ratings, prize games, trading stamps, and clean restrooms.
Because of the excessively high cost of acquiring the site and
building a station, the franchisor will use every conceivable tactic to
increase the sale of gasoline and oil, including setting unrealistic quotas
in the minimum rental and requiring stations to be open seven days
a week, twenty-four hours a day, regardless of the minimal sales, high
labor costs, and exposure to robbery during marginal hours. Similarly,
the dealer is forced to participate in prize games and trading-stamp and
premium giveaways, each of which may increase sales but costs the
dealer two cents or more per gallon. As for tires, batteries, and ac-
cessories (TBA), the dealer is induced to purchase at excessive prices
from designated vendors who then pay commissions to the franchisor;
he is even discouraged from doing major repair work when TBA sales
would be minimal.
Furthermore, the dealer loses the patronage of fleet users to whom
the franchisor sells directly at a two-to-four cent discount and is sub-
jected to the competition of nonbrand stations-to whom the same
gasoline is sold at five to fourteen cents per gallon below the dealer's
31 The Robinson-Patman Act, 15 U.S.C. § 13 (1964), generally prohibiting quantity
discounts, was originally known as the Anti-Chain Store Act.
cost-to the direct competition of company stores in the same retail

market area, and even to the latest ploy of company-owned stores,
selling the same gasoline under a nonbrand name at eight cents below
the normal retail price.3 2 Although the major oil companies protest
that they do not control their dealers' resale prices, there is an almost
unbelievable uniformity in the six-cent gross markup per gallon, a
sum which leaves little margin for profit after deduction of .0165 dol-
lars per gallon for rent, two cents or more for trading stamps, prizes,
or giveaways, and the remainder for labor and other operating ex-
penses.
In contrast, the independent dealer owning his own station can
obtain a bonus of up to 10,000 dollars for signing an exclusive supply
contract-possibly with another 5,000 dollars for capital improve-
ments-and can purchase the same gasoline at a saving of two to four
cents per gallon even though he is licensed to use the trade name of
the major oil company. Understandably, these independents are rare
and rapidly disappearing, the major oil companies sparing no effort to
obtain control of all the good locations through direct purchase or
long-term leases.
Because gas station dealers are not requested to make a capital
payment for their franchise and are only required to purchase about
5,000 dollars' worth of TBA in order to go into business, the oil com-
panies argue they are not franchisees but merely lessees, with no
goodwill in their dealerships. They thus deny that the dealer has a
vested interest barring cancellation or failure to renew. These claims
are, however, wholly inconsistent with the companies' universal re-
fusal to grant a lease unless the dealer agrees to handle their products
and to renew the lease unless the record of performance has been
satisfactory.
It is generally conceded that the gasoline station situation is
almost hopeless and offers a prime example of the worst abuses in fran-
chising. Every one of these complaints may constitute violations of the
antitrust laws and the Federal Trade Commission Act. Nevertheless,
despite strong governmental action and an encouraging array of court
decisions, the major oil companies have proven almost impervious to
attack.
32 See United States v. Standard Oil Co., [19 61-70 Transfer Binder] TRAE REG. REP.
45,070, at 52,751 (N.D. Ohio 1970); GASOLINE MARKETING REPoRT TO ALBERTA (CAN.)
LEcISLATURE (Jan. 1969); Letter from Senator Philip A. Hart to the FTC, Aug. 14, 1970,
set forth in 5 TRADE REG. REP. 50,286, at 55,615 (1970) (reporting on hearings of the
Senate Antitrust and Monopoly Subcommittee and raising questions as to the propriety
of requiring major oil companies to divest themselves of stations).
Comparable to the auto and oil industries are the brewers, who
rest their dominance on short-term beer distributorships, cancelable
on thirty days' notice with little or no provision for the dealer's good-
will. The dealer has a large investment in warehouse facilities to
handle a bulky product, a fleet of delivery trucks, financing to cover
C.O.D. purchases and extension of credit to customers, and the long-
term marketing expense of developing retail distribution routes. The
brewers' brazen practices include setting retail prices and territorial
restrictions and forcing purchase of year-end product. On termination,
some distributors are subject to the brewer's option to puchase their
rolling stock on the straight-line method of depreciation, in one in-
stance even using the double declining balance method permitted by
83
the Internal Revenue Service.
This pattern of total control provided ample guidelines for fran-
chisors during the rapid surge of franchising in the retail distribution
of services and products following World War II. For example, one of
the leaders in the remarkably successful restaurant field obtained its
income not from the modest charge of 1,000 dollars for the franchise3 '
but from its profit on the 700 or more items sold to its franchisees at
unilaterally set and inflated prices.85 With ironclad supervision of
franchise operations, it has been immaterial whether franchisees are
contractually required to buy these items or are otherwise compelled
to do so. As a result of this practice, after one generation a majority of
its franchises have been reacquired by the franchisor.3 6
In most industries, it is common practice to offer distributors one-
year contracts, terminable on thirty days' notice, thus reserving to the
factory total power to preempt the goodwill the distributor has de-
veloped in building up his territory. In fact, it is almost axiomatic
that if a distributor's annual income exceeds the 35,000-to-50,000-dollar
level, the manufacturer will replace him with a direct salesman. If the
distributorship is for a longer term, the same result can be ac-
33 INr. R v. CODE OF 1954, § 167. See generally proposed complaint in Adolph Coors
Co., FTC File No. 701-0032, set forth in No. 503, pt. I [unbound report letter] TRADE
REG. REPs. 4 (Feb. 1, 1971), charging the brewer with resale price fixing, customer and
territorial restraints on distributors, and exclusive dealing. In the first formal recognition
of the dealer's equity, the proposed order details a cancellation procedure to be followed
by the brewery concerning distributors, including a written 180-day notice detailing the
reason for cancellation, and also a grant to the distributor of the unlimited right to sell
his dealership to a third party, subject only to the franchisor's reasonable approval of the
transferee's qualifications.
3' This has recently been increased to $25,000, but the company now actually dis-
courages sales of new franchises; with its ample funds it now concentrates on company
stores.
35 See Hearings, supra note 11, at 2-14 (statements of Mr. Brown).
85For criticism of the "fairly common practice of acquiring successful franchisee
operations through buy-back programs" see Remarks of L. G. Meyer, supra note 16, at 5.
complished by wholly unrealistic increases in the distributor's quota,

an abuse particularly prevalent in the magazine distribution field.37
Man's ingenuity has developed a whole array of both express and
hidden payments with which to fleece the franchisee. First, the capital
charge for the franchise can be as high as the traffic will bear, although
the appeal to the little man has generally kept the figure in the 5,000-
to-25,000-dollar bracket. Also, the franchisee is usually charged a
royalty in the form of a percentage of gross sales38 with a similar charge
for advertising. 39 Then follow hidden markups on every capital asset,
including the sublease, building, equipment, and signs. Every product
or service required in the operation can be the source of profit, either
by making the franchisee purchase from the franchisor or through
kickbacks from "approved" vendors. Thus with little or no invest-
ment of its own the franchisor can obtain all the necessary capital as
well as profits from its franchisees. It can even accelerate the process by
selling subfranchising rights to so-called "area franchisees."
Many franchisors commence business with only a product or an
idea, looking to the franchisees to supply the capital and to assume
a major portion of the risks. When the franchisor reaches the point
of "critical size," it can then use its leverage to obtain direct control
of the most lucrative franchises, utilizing the fi-anchisee's record of
performance as a guide to acquisitions. The motivation for a program
of reacquisition is simply increased profit, since the moderate royalty
on gross sales may be less than the net profit of the particular franchises
of proven success. A policy of reacquisition has been publicly an-
nounced by the leading fried chicken franchisor and was even incor-
porated in the franchise agreement of another major company.40
At the core of all franchising is the licensing of a trademarked

product or service. Under the Lanham Act,41 a licensor must exercise
37 Congressman Fred Rooney's search for the reasons behind the high-pressure sales
techniques of magazine salesmen led him to the incredible annual increase in distributors'
quotas by Cowles Publishing Company, which pushed the distributors to fraudulent
excesses in a futile effort to survive. 115 CONG. REc. E. 11, 150-52 (daily ed. Dec. 29, 1969);
115 CONG. REc. 38, 158 (1969). See Mount Lebanon Motors, Inc. v. Chrysler Corp., 283 F.
Supp. 453, 456 (W.D. Pa. 1968), aff'd, 417 F.2d 622 (3d Cir. 1969) (claim that quota for all
automobile dealers was so high that none could achieve it).
88 The royalty on gross sales, rather than net profit, can make the break-even point
so high that the franchisee cannot avoid losses without working inordinate hours, often
with the aid of his unpaid wife. This type royalty is sometimes hidden in the form of
additional rental on the sublease.
39 While these advertising contributions should evoke strict accountability, many
franchisors in fact use the fund either to advertise for more franchisees or for overhead
and other miscellaneous expenses.
40 See Oxenfeldt & Kelly, Will Successful FranchiseSystems Ultimately Become Wholly.
Owned Chains?, 44 J. RErAiLING 69 (Winter 1968-69).
41 15 U.S.c. §§ 1055, 1064(e)(1), 1127 (1964).
quality control over the licensee or risk the loss of the trademark. But
since that very statute forbids antitrust violations, 42 the franchisor may
face a dilemma in trying to satisfy the requirements of both laws. Thus
the Lanham Act is at the root of many of the economic and legal
problems in franchising since the term -"quality" and its usual com-
panion, uniformity, appear to condone subjective standards for the
"control" required by the statute. It is submitted that the combination
of subjective quality standards and control may evoke fiduciary re-
quirements in their exercise.
In a violent collision of concepts, franchisors basically maintain
that a franchise is merely an embellished license and therefore revo-
cable at will, while franchisees contend a franchise is a license coupled
with an interest, thus restricting unlimited control by franchisors. As
a result of this conceptual disagreement, legislative draftsmen have
had difficulty defining "franchise." Attempts have ranged from the
five-section, page-long definition in Senator Hart's bill,43 to the follow-
ing generic definition in this writer's proposed bill, namely, "an oral
or written arrangement for a definite or indefinite period, in which a
person grants to another person a license to use a tradename ... and
in which there is a community of interest in the marketing of goods or
services .... ."44 This definition avoids prescribing the extensive rights
and duties in this complex relationship. Leaving this prescription to
judicial development will hopefully permit the courts to transcend
formalistic reliance on sanctity of contract, free enterprise, and caveat
emptor. Instead of depending on a definition for the delineation of
rights, the author proposes an analysis of the realities of franchising.
This analysis will disclose the propriety of additional legal and
equitable protection for the franchisee.
Although franchising is used in dozens of industries with myriad
variations in contract terms and practices, in each instance the fran-
chisor putatively provides all of the advantages of scale. For example,
a fast-food franchise could encompass a wide range of expertise, in-
cluding
1. Market research to develop the unit;
42 15 U.S.C. § 1115(b)(7) (1964). See Developments in the Law-Trademarks and Unfair
Competition, 68 HARV. L. Rxv. 814, 895-906 (1955).
43 S. 1967, 91st Cong., 1st Sess. § 2(b) (1967); see H. BROWN, TiE REALrrs oF FRArM-
CHISING 125-26 (1970).
44 Mass. H. 2279 § 1A (1970). This definition was substantially adopted by an FTC
ad hoc committee on franchising in its staff report. No. 444, pt. I [unbound report letter]
TR.AD- RE. REP. 5-9 (Dec. 15, 1969).
2. A standardized product or service together with a trade-

45
mark;
3. General and specific real estate selection;
4. Pledge of credit for land or construction;
5. Design, financing, and arrangements for construction, signs,
and equipment;
6. Intensive national and local advertising procedures and cam-
paigns;
7. Preparation of training courses and manuals;
8. Supervision and guidance in all aspects of operations;
9. Quality control and purchasing economies; and
10. Money handling, bookkeeping, and accounting services.
On the other hand, the franchisor may fail to provide these services
or may exact an excessive price for all or any of them; although most
franchisors widely advertise their accomplishments, they seldom cov-
enant to provide them. In theory, the franchisee need not be experi-
enced and need only provide a capital investment and be able and
willing to work hard.
Almost every franchise relationship is couched in terms of a
revocable license to use the franchisor's "logo," 46 subject to a variety
of specified conditions. Little effort is made therefore to satisfy general
contract law, because the franchisor wants the license to be revocable
at will. Consider that usually the franchisor reserves the sole right to
change prices, to approve vendors, to set quotas, to approve transfers,
and to prescribe intimate and detailed regulations of the franchise
operation. This one-sided arrangement makes it doubtful that a con-
tract exists at all, although the franchisor is usually quite careful to
45 Some thorny problems concerning the obligations of both the franchisor and
franchisee with regard to the trade name have arisen. Since trade names have been
recognized as a tying product under the antitrust laws, Susser v. Carvel Corp., 332 F.2d
505 (2d Cir. 1964), petition for cert. dismissed, 381 U.S. 125 (1965); Siegel v. Chicken
Delight, 211 F. Supp. 847 (N.D. Cal. 1970), it would appear incumbent upon the franchisor
to supply a valid trade name that is not merely an appropriation of a name in the pub-
lic domain and vigorously defend its misuse against third parties. See, e.g, Burger King v.
Hoots, 403 F.2d 904 (7th Cir. 1968); McDonald's Corp. v. Moore, 243 F. Supp. 255 (D.
Ala. 1965), aff'd, 363 F.2d 435 (5th Cir. 1966). Even though business justifications might
exist, the franchisor should be severely limited in his power to change the trade name
or any significant part of the "logo" ["Logo" is a shorthand term coined by patent at-
torneys to refer to the trade name or trademark and all their related characteristics. H.
BROWN, supra note 43, at 14.], not only because of the inherent change in the major item
in the franchisee's purchase, but even more tangibly because of the severe expense to the
franchisee in changing his signs. Although the franchisee cannot sell other products
under the franchisor's name, Susser v. Carvel Corp., supra (prohibiting sale of Christmas
trees by soft ice cream franchisee), it is doubtful that the franchisor can conceal kickbacks
from third party vendors merely through affixing its name to their products.
46 For an explanation of this term see note 45 supra.
make the agreement sound like a contract. This is particularly true of
the noncompetition covenant that is almost universally operative "re-
gardless of the reason for termination." Most courts blindly enforce
the covenant as a matter of "contract law," 47 heedless of the consequent
forfeiture of the franchisee's equity.
The usual requirements of the franchise contract are impossible to
attain, so that it may well be said that franchisees are always in de-
fault. 48 But even if the franchisor does not actually terminate, he
always has his most potent weapon-the whole secret of the relation-
ship-the threat of termination. The threat is, of course, buttressed by
the standard covenant not to compete, with one or more preemptive
rights, all designed to assure that the franchisee will not terminate
for fear of losing his investment and equity.49 The franchisor may even
have an option to acquire the equipment at depressed value. Ad-
ditional control over the franchisee's equity is assured through arbitrary
control over the right to transfer, a right of first refusal in case of
sale, arbitration of all disputes at the franchisor's home office,50 and
even compulsory resale under a one-sided formula. Moreover, since the
franchisor always drafts the franchise agreement and adamantly de-
clines to assent to any modification, he has an untrammeled oppor-
tunity to assure unfair self-preferences. 5 ' Merely to illustrate, the right
of first refusal is often aided by a prohibition on advertising the sale of
the franchise until after the franchisor has refused the offer.
Perhaps through indoctrination, but more so because of a lack of

business sophistication and liquid assets, few franchisees are in a po-
sition to litigate their rights.5 2 The franchisor's power of attrition not
47 See H. BROWN, supra note 6,at 38-41.
48 Some franchise agreements even expressly state that the determination of a default
shall be in the franchisor's "sole and absolute discretion."
49 Although the term of many fast-food franchises is fifteen to twenty years, often
with an option to renew, and automobile and gasoline station dealerships have recently
been extended from a one-to-two-year period to a three-to-five-year period, this ap-
parent durability is merely intended to give the franchisee a false sense of security, since
due to the stringency of most franchise agreements the franchisee is always essentially in
default. Text accompanying note 48 supra. See generally FTC v. Texaco, Inc., 393
U.S. 223 (1968).
50 Although an arbitration covenant would not bar an antitrust suit, see, e.g., A & E
Plastik Pak Co. v. Monsanto Co., 396 F.2d 710 (9th Cir. 1968), nor a securities fraud
claim, Wilko v. Swan, 346 U.S. 427 (1953), it would appear effective against a claim of
fraud, Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) (strong dissent),
at least when contracting parties are of equal bargaining power. Id. at 403.
51 See Semmes v. Ford Motor Co., 429 F.2d 1197, 1207 (2d Cir. 1970) (application of
the rule of strict construction against the draftsmen to defendant automobile franchisor).
52 Given the many abuses in franchising offensive to the antitrust laws, the paucity
of litigation has been surprising, particularly in view of the treble damages intended to
encourage private enforcement and the somewhat newly available class action. FmD. R.
only smothers complaints during the going relationship but even after
termination. At the root of this problem, and of the author's plea for
the intervention of equity in the franchise relationship, is the gross
imbalance that exists between the franchisor and its franchisee, not
merely in the financial sense with the implicit advantages of skilled
financial, marketing, statistical, accounting, and legal techniques, but
more so in the economic and legal logistics. The heart of the matter
was thus summarized:
There is a marked, intentional, and constantly emphasized
disparity in the positions of the parties-the franchisor com-
bining the roles of father, teacher, and drill sergeant, with the
franchisee relegated to those of son, pupil, and buck-private,
respectively. At the core of the franchise relationship is the
contractual control exercised by the franchisor over every as-
pect of the franchisee's business. Starting with the advertise-
ment which calls for "no experience," the franchisor inculcates
the franchisee with the necessity of being taught, guided, and
controlled not only during the initial training period but
throughout the existence of the franchise. The franchisor con-
trols the site, commissary purchases, purchases from other
vendors, method of business operations, labor practices, qual-
ity control, merchandising, and even record keeping. This
control is buttressed by the contractual requirement that the
franchisee must obey the commands of the Operating Manual
as expounded by the franchisor's supervisor, on pain of losing
the franchise if he disobeys them and under constant threat
of such termination. And upon termination, or failure to
renew, the franchisee is confronted with the covenant 53
not to
compete and forfeiture of his equity in the business.
It is in the light of these conditions that the fiduciary relationship
must be considered. As a matter of trial technique, it should be em-
Civ. P. 23. Aside from the fear of retribution among existing franchisees and the risk of un-
favorable publicity for the trademark system of which the franchisee is a part, perhaps
the more stringent deterrents are the lack of counsel familiar with the relation of
franchising and the antitrust laws and the exceedingly high costs of litigation. Recog-
nition of the latter led Senator Philip A. Hart, as Chairman of the Senate Subcommittee
on Antitrust and Monopoly, to recommend to the Small Business Administration that it
amend its rules to permit loans to small businessmen to support meritorious antitrust
litigation. On the other hand, efforts of franchisees to raise funds among other members
of their class have been met with counterclaims of combinations in restraint of trade,
Merit Motors, Inc. v. Chrysler Corp., Civil No. 2000-70 (D.D.C., filed July 22, 1970), and
of improper solicitation sufficient to warrant the disallowance of class status as well as
dismissal of the suit, Halverson v. Convenience Food Mart, Inc., Civil No. 70C-499 (N.D.
Ill., filed Mar. 3, 1970). In order to prevent these limitations from making antitrust re-
lief illusory, it has been recommended that the Federal Rules of Civil Procedure be
amended to permit early notice of suit to each member of the class, including proposals
for joint effort to share the costs of litigation, subject to court supervision.
53 H. BRoWN, supra note 6, at 41.
phasized that most judges will have little familiarity with the franchise
relationship so that counsel must make a painstaking exposition of the
facts in the particular case. Without this effort, the franchisee's com-
plaint will run into a stone wall of incredulity. Perhaps for this very
reason, except in the antitrust field, the few litigated cases in state
courts have reflected a doctrinaire approach, based on sanctity of con-
tract unless fraud can be shown in the inducement. 54 Courts have
ignored the question of whether these one-sided agreements are un-
conscionable or can be contracts at all in view of the numerous sub-
stantive areas wherein the franchisor may act on purely subjective
standards.
Since the franchising relationship is characterized by such perva-
sive power of control, this writer proposes the following principles:
(1) When one has power to control another, a fiduciary obligation
exists; (2) a fiduciary's duty is coextensive with his power to control;
and (3) when the power to control another is abused by preference of
self, equity will intervene. I immediately concede that no reported
American case has applied these theories to franchising, but at the
same time, no court has considered and rejected them. Significantly,
however, the fiduciary nature of the franchise relationship was recently
informally recognized by the Federal Trade Commission, the agency
perhaps most intimately familiar with franchising and statutorily con-
cerned through its obligation to prevent "unfair methods of compe-
tition."15 5 The General Counsel of the FTC stated: "[F]ranchisors
frequently speak of their relationship with their franchisees as being

one of trust and confidence. It is truly a fiduciary relationship."5 6 Also,
the Commission is reported as endorsing the statement of Commis-
sioner MacIntyre before the May 1969 Conference of the International
Franchise Association that, "not only must the franchisor give accurate
information about his franchise system, but.., he also has the-affirma-
tive duty to reveal any unfavorable news concerning the system." 57
Unfortunately, most fiduciary relationships have been so long
established in the law that few occasions have arisen to analyze
the basis of their inception. Consider, for instance, partners, attorney
and client, employer and employee, trustee and beneficiary, and-
64 Gifford v. Gifford, 854 Mass. 247, 248, 236 N.E.2d 892, 893 (1968) (application of
sanctity of contract doctrine to enforce support payments under a separation agreement).
5515 U.S.C. § 45(a)(1) (1964).
56 Hearings, supra note 11, at 829 (statement of John V. Buffington, General Counsel,
FTC).
57Id. The complete statement of the FTC General Counsel, including this quote
from Commissioner McIntyre, is set forth in H. BROWN, supra note 6, at 199, 206.
more recently-officer, director, majority stockholder, and minority

stockholder. It is submitted that in each of these examples the courts
have relied upon three propositions: the pervasive powers held by one
party; the gross disparity of the parties in a complex transaction usually
of long duration; and the rampant opportunities for abuse, particularly
through clandestine self-preference.
In many franchises the entire gross receipts of the franchisee are
transmitted to the franchisor for disbursement. And in almost all
franchises, the franchisee is required to disclose his most intimate
operations and confidential records to the franchisor. Although the
handling of another's funds58 and access to confidential records5" would
appear to be classical cases for application of fiduciary obligations, even
without them the usual power of the franchisor to inspect, supervise,
and discipline the franchisee should suffice. While control can be
beneficiently exercised, the franchisee is constantly at the mercy of the
franchisor. Courts may well have to draw the line for particular
franchises, making the fiduciary obligation coextensive with the power
to control in the particular case.
At this point, perhaps discussion of analogous precedents in areas
akin to the principal functions in franchising will be helpful in
exemplifying the constant availability of equity to prevent injustice.6 0
In a recent Massachusetts case, the court found a fiduciary obligation
not after the contract had been signed but at its very signing."' The
fiduciary duty arose when trust and confidence were reposed in the
defendant and the latter had knowledge of this reliance. Although the
case involved a claim by a nursing home operator against a lender-
builder, the theory is directly applicable to franchising in its reliance
on the great disparity of the parties, the intimacy of their relationship,
and the complexity of the transaction. 62 The court concluded:
In redressing an abuse of trust and confidence, equity will re-
view such factors as the relation of the parties prior to the in-
58 See 5 A. ScOTT, TRUSTs §§ 404.1, 404.2 (2d ed. 1956).
59 Barry v. Covich, 332 Mass. 338, 344, 124 N.E.2d 921, 924 (1955) (constructive trust
impressed when information confidentially given or acquired was wrongfully used for the
gain of recipient and to the detriment of an innocent party). The seldom-used common-
law tort of unfair competition that protects the franchisor's manual of operations as a
trade secret would appear equally available to guard the franchisee's confidential records
and operations. McDonald's Corp. v. Moore, 243 F. Supp. 255, 258 (D. Ala. 1965), aff'd,
363 F.2d 435 (5th Cir. 1966).
60 See Pound, The Progress of the Law, 1918-1919-Equity, 33 HARv. L. REv. 420
(1920).
61 Broomfield v. Kosow, 349 Mass. 749, 212 N..2d 556 (1965).
62 The court gave much weight to G. BOGERT, TRUSTS AND TRUSTEES § 481 (2d ed. 1969),
and 3 A. ScoTr, supra note 58, § 468. See RESrATEMENT OF RESTITUTION § 166 (1937).
TEXAS.LAW REVIEW [Vol. 49:650
cidents complained of, the plaintiff's business capacity or lack
of it contrasted with that of the defendant, and the readiness
of the plaintiff to follow the defendant's guidance in compli-
cated transactions wherein the defendant has specialized
knowledge. Equity will, in sum, weigh63
whether unjust enrich-
ment results from the relationship.
In similar circumstances, the same court found an affirmative duty of
disclosure to exist when a specialist had taken advantage of an aged
inventor in handling his patents."
Many courts have stated that in the absence of an intent to violate
some provision of the antitrust laws, nothing precludes the termination
of a franchise in accordance with its terms. 65 These cases reflect the
standard common-law view that no good faith obligation exists in the
performance of a contract. 66 Yet without much discussion of its radical
departure from that view, a Massachusetts court recently awarded
damages for the bad faith termination of an exclusive territorial dis-
tributorship when secret negotiations for a sale in the dealer's territory
67
had commenced prior to the termination.
It has also been found that the fiduciary obligations of an agent
arise not only from the franchisor's assumption of the duties of pur-
chasing agent for the franchisee's needs, but also from its absolute
control of the standards and specifications for all purchases. 68 Similarly,
in spite of the usual contractual term that the franchisee shall not be
regarded as the agent of the franchisor, the latter has been held liable
for the franchisee's torts, based on "ostensible" rather than "apparent"
or "actual" authority, a category of liability described by Professor
Warren Seavey as flowing from the power of the principal rather than
63 Broomfield v. Kosow, 349 Mass. 749, 755, 212 N.E.2d 556, 560 (1965).
64 Reed v. A. E. Little Co., 256 Mass. 442, 152 N.E. 918 (1926). See 4 A. ScoTr, supra
note 58, § 462.2; RrSATEMENT OF RErSrrTTON, supra note 62, § 201.
65 Ricchetti v. Meister Brau, Inc., 431 F.2d 1211 (9th Cir. 1970); Scanlan v. Anheuser-
Busch, Inc., 888 F.2d 918 (9th Cir.), cert. denied, 391 U.S. 916 (1968); Amplex of Md., Inc.
v. Outboard Marine Corp., 380 F.2d 112 (4th Cir. 1967); Ford Motor Co. v. Webster's Auto
Sales, Inc., 861 F.2d 874 (Ist Cir. 1966); Division of the Triple T Service, Inc. v. Mobil Oil
Corp., 60 Misc. 2d 720, 304 N.Y.S.2d 191 (1969), aff'd, 311 N.Y.S.2d 961 (1970) (no opinion).
See 5A A. CORBIN, CONTRACTS § 1229 (1964); Hewitt, Termination of Dealer Franchises
and the Code-Mixing Classified and Coordinated Uncertainty with Conflict, 22 Bus. LAw.
1075 (1967); 9 S. WLLWSTON, CONTRACrS § 1017A (3d ed. 1967).
66 Graf v. Hope Bldg. Corp., 254 N.Y. 1, 171 N.E. 884 (1930). But see Division of the
Triple T Service, Inc. v. Mobil Oil Corp., 60 Misc. 2d 720, 304 N.Y.S.2d 191 (1969), aff'd,
311 N.Y.S.2d 961 (1970) (no opinion) (recognizing the requirement of good faith during the
,contract).
67 RLM Associates, Inc. v. Carter Mfg. Corp., - Mass. -, 248 N.E.2d 646 (1969).
68 Compare Berenson v. Nirenstein, 326 Mass. 285, 289, 93 N.E.2d 610, 612 (1950), in
which "full and complete relation of principal and broker" existed with situations in
which there is a "mere engagement" to buy in behalf of another, a relationship which
,does not give rise to fiduciary obligations. E.g., Salter v. Beal, 321 Mass. 105, 108, 71 N.E.2d
872, 873 (1947).
19711 FRANCHISING AND EQUITY
from any contractual terms. 69 Thus the efforts of franchisors to disclaim

an agency relationship in the franchise agreement may be precluded by
the courts either when they are inconsistent with the effective relation-
ship established by the bundle of specific rights or when offensive to
public policy, 70 just as it is doubtful that by contract the president of
a corporation could shed his fiduciary obligations to the corporation
and its stockholders, that partners could negate their mutually fiduciary
obligations, 71 or that an attorney could so provide in a contract with
72
his client.
In a different frame of reference, most jurisdictions impose fiduci-
ary obligations on a foreclosing mortgagee, both with regard to his
conduct of the sale and his accounting for the proceeds to junior
lienholders and the mortgagor. This analogy is particularly apposite
since the terminating franchisor never feels obliged to honor the
usual requirements of a foreclosure proceeding or to account to the
franchisee for the proceeds resulting from a resale of the franchise.
Perhaps the greatest erosion of franchisors' favorite, and usually suc-
cessful, defenses-sanctity of contract and caveat emptor-has appeared
in recent statutes. Although hardly enacted with franchising in mind,
69 See Note, Liability of a Franchisorfor Acts of the Franchisee, 41 S. CAL. L. REv.
143, 158-59 (1968).
70 For statutory limitation on unreasonable disclaimer of express warranties see UN-
FORM COMMERCIAL CODE § 2-316(1) (Official Text 1962); MAss. GEN. LAWS ANN. ch. 106,
§ 2-316(1) (1958).
71"There is no stronger fiduciary relation known to the law than that of a copart-
nership, where one man's property and property rights are subject to a large extent to
the control and administration of another." Sahlinger v. Sahlinger, 56 Wash. 134, 137,
105 P. 236, 237 (1909) (emphasis added).
72 The newly adopted ABA Code of Professional Responsibility makes it an unethical
practice for an attorney even to attempt to obtain exoneration from liability to his client
for his personal malpractice. ABA CODE OF PROFESSIONAL R.EsPONsimIrry, D.R. 6-102A
(1969).
73 The normal mortgage requirements of notice, public advertisement, public auc-
tion, acquisition by mortgagee, "chilling" of the bidding, and accounting for any surplus
are completely foreign to franchise practices. See UCC requirements for foreclosure of
security interests in personal property, UNIFORM COMMERCIAL. CODE § 9-504 (Official Text
1962), particularly that "the method, manner, time, place and terms must be commer-
cially reasonable." Id. § 9-504(3). See also Keene Lumber Co. v. Leventhal, 165 F.2d 815
(1st Cir. 1948) (tort of wrongful interference with advantageous relations arising out of
abuse in mortgage foreclosure).
On a different tack, query whether the self-help termination procedures of fran-
chisors may be a denial of due process under the fourteenth amendment; see Sniadach v.
Family Fin. Corp., 395 US. 337 (1970) (lack of due process in wage garnishment prior
to court hearing); Fuentes v. Faircloth, 317 F. Supp. 954 (S.D. Fla. 1970) (This case ques-
tions constitutionality of a typical state repossession law allowing forcible entry and
taking, based solely on creditor's statement of nonpayment, in spite of debtor's claim of a
meritorious defense. This situation may also raise the issue of contractual waiver of con-
stitutional rights when there is a gross imbalance of power between contracting parties);
Lapraese v. Raymours Furniture Co., 315 F. Supp. 716 (N.D.N.Y. 1970); Note, Some Im-
plications of Sniadach, 70 COLUM. L. REv. 942 (1970). See generally Comment, Nonjudicial
Repossession-Reprisal in Need of Reform, 11 B.C. IND. & Coat. L. R1v. 435, 440-49
(1970).
it has been suggested nevertheless that the Uniform Commercial Code
might provide relief to franchisees through its requirements of good
faith and conscionability in requirements contracts,74 "best efforts" by
a seller in exclusive dealing agreements, and "reasonable notice" before
termination of these arrangements."5 However, while decrying the in-
equity of the situation and dramatically supporting the need for
remedial legislation, a New York court recently held these statutory
provisions inapplicable to the termination of a gasoline dealership
because of its indivisibility from the lease of the premises, the UCC
being applicable only to the sale of personal property.78 The court was
apparently unaware that site control is a prime weapon of franchisors,
whether through sublease or collateral pledge of the lease, and that
these property rights should be subordinated to the interest of the
franchisee to whom the franchisor sold a right to do business. Equity
should rule that the legal title to the real estate is held in trust for
the benefit of the franchisee; otherwise there would be a forfeiture
of valuable rights to the advantage of the very person who sold the
rights. This rule is universally applied when title to real estate is given
as security for a debt.77 Subordination of property rights to the primary
dealership contract would also be consonant with the rule that the
seller of a business will be barred from competing with the buyer
even in the absence of an express noncompetition covenant. 8 This
equitable rule is grounded on the theory that the buyer would other-
wise be deprived of the benefit of his bargain by the very person who
made the sale. Throughout all franchising runs the same issue, namely,
74 UNIFORMA COMMERCIAL CODE §§ 2-302, -306 (Official Text 1962).

75 Id. § 2-309(2)(3); see Hewitt, supra note 65, at 1075; Leff, Unconscionability and the
Code-The Emperor's New Clause, 115 U. PA. L. REV. 485 (1967).
76 Division of the Triple T Service, Inc. v. Mobil Oil Corp., 60 Misc. 2d 720, 304
N.Y.S.2d 191 (1969), aff'd, 311 N.Y.S.2d 961 (1970) (no opinion).
77 In Shadman v. O'Brien, 278 Mass. 579, 583, 180 N.E. 532, 533 (1932), the court
said that its jurisdiction to grant equitable relief to plaintiff-who had carelessly con-
fided in a supposed friend with whom he was dealing-is "not based merely upon op-
pression by a creditor . . . [but] arises out of the situation of confidence and of quasi
fiduciary relationship, where actual fraud is not present .... "
"When property has been acquired in such circumstances that the holder of the
legal title may not in good conscience obtain the beneficial interest, equity converts him
into a trustee." Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 386, 122 N.E. 378,
380 (1919) (Cardozo, J.).
78 Tobin v. Cody, 343 Mass. 716, 720, 180 N.E.2d 652, 656 (1962). "[I]n every contract
there is an implied covenant that neither party will do anything having the effect of
destroying or injuring the right of the other party to receive the fruits of the contract."
Lutz v. Bayberry, 148 N.Y.S.2d 762, 767 (1956) (pension fund). Similarly, some courts
have prohibited the termination of a franchise before the franchisee has had an oppor-
tunity to recoup his investment with a reasonable profit. See Gibbs v. Bardahl Oil Co.,
331 S.W.2d 614 (Mo. 1960); Beere v. Columbia Axle Co., 233 Mo. App. 212, 117 S.W.2d
624 (1938).
whether equity will allow the forfeiture of the franchisee's goodwill to
the dominant franchisor.
In order to protect that goodwill, Puerto Rico adopted a statute
prohibiting the termination of a dealership except for "just cause," a
phrase of civil import rather comparable to good faith.79 Nevertheless,
disregarding the declared purpose of the legislature and the comparable
penal features of the federal antitrust laws, which indicate the strong
public policy involved, 0 the First Circuit held the law unconstitutional
as applied to a preexisting dealership that was terminable at will.8 '
The court ignored any consideration that the common law itself may
have required good faith and that the relationship was more of a status
than a contract. In contrast, in anticompetitive situations, rather than
being bound by such formal defenses as the burden on a preexisting
contract, the Supreme Court has repeatedly held that "we must look at
82
the economic reality of the relevant transactions."
In the area of fraud, common-law rules have been expanded by
statute to require full disclosure and the banning of manipulative and
deceptive practices in the sale of securities. 8 3 It has been strongly urged
that a franchise is a security and therefore entitled to the benefit of
the same protection.8 4 Moreover, the FTC has adopted the standard
of full disclosure for the sale of franchises under the statutory pro-
hibition of "unfair and deceptive acts or practices,"8 5 and pending
79 P.R. LAws ANN. tit. 10, § 278a (Supp. 2A, 1969).
80 Persons injured by violations of the antitrust laws may recover treble damages
as well as attorneys' fees, 15 U.S.C. § 15 (1964), or obtain injunctive relief, 15 U.S.C. § 26
(1964). The United States may recover actual damages, 15 U.S.C. § 15a (1964), or double
damages if the violation involved Government funds, 31 U.S.C. § 231 (1964).
81 Fornaris v. Ridge Tool Co., 423 F.2d 563 (Ist Cir.), rev'd, 400 U.S. 41 (1970) (per
curiam reversal on ground of abstention).
82 United States v. Concentrated Phosphate Export Ass'n, 393 U.S. 199, 208 (1968).
83 Securities Exchange Act of 1934, 15 U.S.C. 78 (1964); SEC Rule lOb-5, 17 C.F.R.
240.10b-5 (1970). See generally A. BROMBERG, SEcuRTEs LAW: FRAuI--SEC RuLE lOb-5
(1969); 3 L. Loss, SECURrTE REGULATION 1421-528 (2d ed. 1961).
84 See note 16 supra.
85 15 U.S.C. § 45(a)(1) (1964). "[N]ot only must the franchisor give [to a prospective
franchisee accurate information about his franchise system, but . . . he also has the af-
firmative duty to reveal any unfavorable news concerning the system." Address by FTC
Commissioner Everette MacIntyre, Conference of International Franchise Association, May
8, 1969, found in 5 TRADE REG. REP. 50,240, at 55,485 (1970). FTC General Counsel
John V. Buffington endorses Commissioner Maclntyre's assertion and elaborates that
"unfavorable news" that must be disclosed includes "pending law suits or FTC actions, or
the fact that the franchisor competes in his own systems." No. 451, pt. I [unbound report
letter] TRADE REG. REP. 6-7 (Feb. 2, 1970).
Although the Federal Trade Commission Act is not designed to provide recovery for
private claimants, recently proposed findings of a FTC hearing examiner would require
a franchisor guilty of misrepresentation to refund sums collected from deceived fran-
chisees. Universal Electronics Corp., 3 TRADE REG. REP. 19,890, at 21,515 (FTC 1970).
Under its extensive rulemaking power, 15 U.S.C. § 46(g) (1964), the FTC should adopt
regulations prescribing in detail the information that franchisors must disclose to
prospective franchisees.
8
federal" and state8 7 legislation would require extensive disclosure to
potential franchisees in the form of a prospectus. In California the
first law has been enacted, although the extent of legislative compro-
mise is evident in its exemption of any franchisor with capital of
5,000,000 dollars or twenty-five existing franchisees, 88 perhaps the first
time that bigness has been equated with honesty.
As for statutory limitation on termination and the right to renew,
numerous proposed laws would require "due cause," "just cause,"
"good faith," or their equivalent.8 9 In Delaware the first statute
with
these requirements for all franchisees has been passed; 90 in numerous
other states similar legislation has been enacted for auto dealers. 91
"Good faith" in these acts should be contrasted with the federal Auto
Dealers Act in which good faith is incredibly defined solely in terms of
"coercion and intimidation or the threat of either."9 2
When a court does find-whether on the basis of a statute or
common-law principles-that a fiduciary relationship exists, it should
have complete power to provide relief from all manifestations of self-
preference, including
1. Imposition of an affirmative duty to disclose all significant
matters to the franchisee, including extra charges for rental,
fixtures, equipment, and comissary purchases. 93
2. Prohibition of overreaching or overbearing in any charges,
particularly forbidding kickbacks, whether secret or not. 94
3. Refusing to enforce unfair terms against the franchisee, in-
S0S. 3844, 91st Cong., 2d Sess. (1970). Although the bill may not receive consideration
in the current session, its reintroduction has been predicted. Note 5 supra.
87 See, e.g., Mass. S. 110 (1971); note 6 supra. Similar legislative proposals are ex-
pected in California, New York, Tennessee, Texas, and Virginia.
88 CAL. CORP. CODE § 31101 (West Supp. 1971.
89 See, e.g., S.1967, 91st Cong., 1st Ses. § 4 (1969); H. BROWN, supra note 6, at 126.
90 57 Laws of Del. ch. 693 (1970). Enacted in late 1970, the provision prohibits unjust
terminations or failure to renew "without good cause" or "in bad faith."
91 CoLo. REv. STAT. ANN. § 13-11-14(11)(d) (1963), held constitutionally invalid in
General Motors Corp. v. Blevins, 144 F. Supp. 381, 395 (D. Colo. 1956) (the original lan-
guage remains unchanged in the present codification); FLA. STAT. ANN. § 320.64(8) (1968);
IOWA CODE ANN. § 322.3(5) (1966); MAss. ANN. LAWS ch. 93B, § 9 (Advance Supp. 1970);
MINN. STAT. ANN. § 168.27 14(3) (1960); N.Y. GEN. Bus. LAw 9§ 197 to 197-a (McKinney
Supp. 1970); N.C. GE. STAT. § 20-305(3) (1965); R.I. Gau. LAWs. ANN. § 31.5-35(3) (1956);
TENN.
businessCODE ANN. between
§ 59-1714(h)(4) (1968). manufacturers,
The recent Massachusetts
practices motor vehicle distributors,enactment--regulating
and dealers-broadly
extends the provisions of the state's "baby" FTC Act. See Brown, supra note 2.
92 15 U.S.C. § 1221(e) (1964).
93 "When confidence is reposed and accepted, the person trusted is liable for express-
ing dishonest opinions ...[and] he is also liable for concealing facts which by reason of
the relationship he should disclose." Reed v. A. E. Little Co., 256 Mass. 442, 449, 152 N.E.
918, 920-21 (1926) (contract to assign patent right between inventer and corporation).
94 See Jima, Ltd. v. Mister Donut of Canada, Ltd., 3 Ont. 629 (1970) (appeal pend-
ing).
cluding restrictions on transfer, covenants not to compete, 95
and termination penalties; in particular compelling the
franchisor who wants to repurchase a franchise to offer the
franchisee the fair value of his business, with no compulsion
on the franchisee to sell, and permitting the franchisee who
wants to sell or make a gift of his franchise to do so to a per-
son of his own choice who need be no more qualified than
he was when he entered into the agreement.9 6
4. Requiring a high degree of care in the selection and policing
of supervisors and fair and reasonable procedures for the
franchisee's complaints against supervisors.
5. Requiring the franchisor to disclose it has insulated itself
from legal and financial liability by interposing a wholly
owned subsidiary between itself and the franchisee91 and
striking as unconscionable the clause permitting the fran-
chisor to evade further responsibility upon its assignment of
the franchise.
6. Denying the franchisor all compensation, even though other-
wise reasonable, if there has been a serious abuse of fiduciary
obligations.9 8
7. Barring compulsory purchases at the franchisor's unilaterally
95 Courts invariably scrutinize covenants not to compete and have almost universally
confined their application to what is both reasonable and necessary, regardless of the
terms of the express covenant. See New England Tree Expert Co. v. Russell, 306 Mass.
504, 509, 28 N.E.2d 997, 999 (1940).
96Although courts should hesitate to grant the remedy of contract reformation,
respect for the franchisee's property right in his equity would appear to justify the abro-
gation of contract clauses restricting the franchisee's rights in the disposal of his franchise.
Rufus E. Wilson, Head of the FTC Bureau of Restraint of Trade, suggests in Ad Hoc
(FTC) Committee Report on Franchising that restraints on the franchisee's right to dis-
pose of his franchise might well constitute a per se violation of the antitrust laws. No.
444, pt. I, [unbound report letter] TRADE REG. REP. 48 (Dec. 15, 1969).
97 This principle emanates from the developing law on "piercing the corporate veil,"
which has application particularly when fraud is suspected. See My Bread Baking Co.
v. Cumberland Farms, Inc., 353 Mass. 614, 619, 233 N.E.2d 748, 752 (1968). See generally
Centmont Corp. v. Marsch, 68 F.2d 460, 464 (1st Cir. 1933), cert. denied, 291 U.S. 680
(1934); The Willem Van Drie, Sr. v. Pennsylvania R.R., 252 F. 35 (4th Cir. 1918), cert.
denied, 252 U.S. 584 (1920); H. BALLANTINE, CORPORATIONS §§ 156-38 (rev. ed. 1946); Doug-
las & Shanks, Insulation from Liability Through Subsidiary Corporations, 39 YALE L.J.
193, 195-210 (1929); Note, Alternative Methods of Piercing the Corporate Veil in Con-
tract and Tort Cases, 48 B.U.L. Rv. 123 (1970); Note, Liability of a Corporation for
Acts of a Subsidiary or Affiliate, 71 HARv. L. REv. 1122 (1958).
In line with its declared policy of examining the economic realities in antitrust mat-
ters, United States v. Concentrated Phosphate Export Ass'n, 393 U.S. 199, 208 (1968), the
Supreme Court has experienced little difficulty in detecting unfair practices through
several levels of distribution, regardless of the degree of corporate ownership. Perkins v.
Standard Oil Co., 395 U.S. 642 (1969).
98 Because of aggravated abuse of fiduciary obligations, in Broomfield v. Kosow, 349
Mass, 749, 212 N.E.2d 556 (1965), the court imposed a constructive trust on sums paid to
a corporate lender pursuant to a construction contract rendered invalid by the lender's
bad faith.
determined prices, veto power over suppliers, and restrictions
on equipment purchases.9 D
8. In case of termination, requiring the franchisor to give
adequate notice, to conduct a public sale, and to account to
the franchisee for the proceeds of any resale or, if the business
is retained by the franchisor for operation as a company store,
requiring payment to the franchisee of the full fair market
value as a going enterprise.
9. Requiring the franchisor to return to the franchisee all over-
charges for rental, equipment, and inventory, and to account
for all kickbacks. 100
10. Rescission, including a reasonable charge for the franchisee's
use of the franchise and an allowance for the value of the
franchisee's services. 01
Perhaps the most intriguing aspect of recognizing a fiduciary re-

lationship in franchising lies in its connection with existing federal
law. Whether or not a federal common law is developing in spite of
Erie v. Tompkins,10 2 determinations under federal law cannot ignore
common-law principles. Inversely, decisions under federal statutes
necessarily imply common-law conclusions. For example, a fiduciary
relationship is necessarily implied in recent determinations by the
National Labor Relations Board that certain franchisees were "em-
ployees" within the National Labor Relations Act and therefore en-
90 These prohibitions are based on conscionability, but should help resolve the con-
flict between the Lanham Act's requirement that the franchisor exercise quality control
and the antitrust restrictions on tying and exclusive sales contracts. See text accompany-
ing notes 41 & 42 supra; Siegel v. Chicken Delight, Inc., 311 F. Supp. 847 (N.D. Cal.
1970). But see Susser v. Carvel Corp., 332 F.2d 505 (2d Cir. 1964), cert. dismissed as im-
providently granted, 381 U.S. 125 (1965).
loo See Jira, Ltd. v. Mister Donut of Canada, Ltd., 3 Ont. 629 (1970) (appeal pend-
ing).
101 See Runyan v. Pac. Air Indus., Inc., 2 Cal. 8d 304,
466 P.2d 682, 85 Cal. Rptr. 138
(1970). In determining the liabilities between the parties, the franchisor should have
the burden of proving the fulfillment of his fiduciary duties and the legitimacy of any
claim he alleges against the franchisee. Cf. RESTATEMENT (SECOND) OF TRUSTS § 172, com-
ment b at 377 (1959). Furthermore, all doubt should be resolved against the malfeasant
franchisor. See Samia v. Central Oil Co., 339 Mass. 101, 126, 158 N.E.2d 469, 485 (1959)
(corporate directors bear burden of proving propriety of their expense accounts). Cf. II A.
Scorr, THE LAW OF TRUsTs § 172, at 1399 (3d ed. 1967). For a comparable antitrust rule
see Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 265 (1946); Note, Private Treble
Damage Antitrust Suits: Measure of Damages for Destruction of All or Part of a Busi-
ness, 80 HARv. L. REv. 1566, 1572 (1967). Borrowing further from antitrust principles, it
may be suggested that "unclean hands" not be recognized as a defense, but rather be
given weight through possible mitigation of damages. Perma Life Mufflers, Inc. v. Int'l
Parts Corp., 392 U.S. 134, 139-40 (1968).
102 304 US. 64 (1938). For a general discussion of the federal common law see
Friendly, In Praise of Erie-And of the New Federal Common Law, 39 N.Y.U.L. REv.
383 (1964); Note, The Federal Common Law, 82 HAv. L. REv. 1512 (1969).
titled to collective bargaining rights. 0 3 Similar rights were granted in
1970 by the Swedish Labor Court to the gasoline station dealers of
Esso, based on the oil company's dominant economic power and the
dealers' dependence on the oil company for the continuity of supplies.
Relying on the same principles, the United States Supreme Court con-
firmed a finding of unfair methods of competition under section 5 of
the Federal Trade Commission Act against Texaco with regard to the
compulsory purchase of tires, batteries, and accessories, in spite of the
complete absence of any evidence of overt directions by the oil com-
pany. 04 The decision was based on the "dominant economic power"
of the company and the dealers' knowledge of the fact that unless they
purchased TBA from Texaco-specified sources their short-term deal-
erships would not be renewed. 0 5
In mid-1970 the FTC instituted a complaint against a transmission
repair franchisor for deceptive practices used by its franchisees to obtain
repair jobs. 0 6 Allegedly, the franchisees would not reassemble trans-
missions for customers who refused to authorize further work and
failed to disclose when repairs were made with used parts. Pertinent
to the issue of a fiduciary relationship is the FTC contention that the
franchisor is responsible for these practices because it controls the
"business strategy" of its franchisees and those who fail to comply with
its prescribed methods of operation may have their franchises ter-
minated. In substance, there is an implicit finding that this control
makes the franchisees agents of the franchisor in the perpetration of
fraudulent acts.
Furthermore, if the fiduciary character of the franchise relation-
ship is recognized by state courts or legislation, this local law may be
expected to influence determinations of anticompetitive practices under
the antitrust laws, particularly in the application of the "rule of
reason."' 0 7 In any case, it would appear feasible under the rule of pen-
dente lite to add to an antitrust complaint a diversity claim based on
breach of fiduciary obligations. On that basis, it should be possible to
obtain temporary injunctive relief against an eviction of a franchisee
103 News Syndicate Co., 164 N.L.R B. No. 69, at 422 (1967); Mister Softee, Inc. 162
N.L.R.B. No. 22, at 354 (1966). Contra, Southland Corp., 1968-1 CCH NLRB DEC. (170
N.L.R.B. No. 159) 22,351, at 29,465 (1968).
104 FTC v. Texaco, Inc., 393 US. 223 (1968).
105 Id. at 228-29.
106 Aamco Automatic Transmissions, Inc., 3 TRADE REc. REP. 19,283, at 21,436,
19,425, at 21,536 (FTC 1970).
107 Standard Oil Co. v. United States, 221 U.S. 1, 66 (1911).
even though not technically to'restrain the alleged antitrust viola-
tion.1 08
Although no United States court has yet considered the applica-
bility of fiduciary obligations to franchising, a Canadian court has re-
cently done so in a case of first impression. 1 9 Significantly, the Ontario
court-without the aid of the American antitrust laws-was con-
strained to address itself to basic equitable concepts. After a painstaking
analysis of the franchisor's contractual and practical control over every
aspect of the franchisee's business, it had little difficulty finding the
existence of fiduciary duties and constructive fraud in the franchisor's
secret retention of commissions and rebates from the vendors with
whom the franchisees were required to deal. While relying on cases
such as Meinhard v. Salmon"0 and Broomfield v. Kosow, 111 the court
found "nothing new in the principles sought to be imposed." It con-
cluded:
In this particular type of relationship it appears ... that
franchisor and franchisee are bound together over a long per-
iod of years in a relationship which in many respects is almost
as close as that of master and servant. While of course it is not
the same, nevertheless the relationship is so close that confi-
dence is necessarily reposed by the one in the other.12
The abuse of that confidence through self-preference was held action-
able.
Perhaps equity will at long last acknowledge the basic principle

that when a franchisor either sells or grants a franchise to which the
franchisee devotes his capital and labor, the franchisee is entitled to a
reasonable opportunity to succeed. This principle would require that the
franchisor perform its function of developing and maintaining a fran-
chise system reasonably capable of fulfilling this implicit representation
to the prospective franchisee. Within reasonable limits it would impose
restraints upon the capital charge for a franchise, the amount of the
royalty in the form of a percentage on gross sales, and all other charges,
based on the underlying requirement of a sufficient remainder for the
108 See Helfenbein v. International Indus,, Inc,, 5 T..AD REG. REP. 73,440, at 89,820
(8th Cir. 1971) (confirming denial of temporary injunction against eviction of a franchisee
since not a part of the alleged antitrust violation of tying sales and therefore not enjoin-
able under 15 U.S.C. § 26 (1964) and 28 U.S.C. § 2283 (1964)).
109 Jima, Ltd. v. Mister Donut of Canada, Ltd., 3 Ont. 629 (1970) (appeal pending).
110 249 N.Y. 458, 164 N.E. 545 (1928).
1"1 349 Mass. 749, 212 N.E.2d 556 (1956).
112 Jima, Ltd. v. Mister Donut of Canada, Ltd., 3 Ont. 629, 639-40 (1970).
1971] FRANCHISING AND EQUITY 675
franchisee to obtain a fair return for his investment and effort. Al-
though the franchisee should not expect a guaranty of success, the
franchisor should be prepared to demonstrate reasonable proof of
sound concepts and empirical testing. While the franchisee should
then expect to be subject to the normal competition of the marketplace,
he should be totally free from both direct and indirect competition
emanating from the very franchisor from whom he acquired his busi-
ness opportunity. Finally, subject to reasonable controls by the fran-
chisor in the operation and disposition of the franchise, it must be
recognized that the franchisee is the owner of an independent business,
entitled to the full protection of that asset which the law affords to
every other businessman.

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Franchising---"the last frontier of the independent business-

Although franchising had its inception over a century ago when

Franchising has been aptly described by Senator Philip A. Hart

The problem of protecting the franchisee from wrongdoing ex-

themselves in direct retail competition with stores owned by the

cost-to the direct competition of company stores in the same retail

complished by wholly unrealistic increases in the distributor's quota,

At the core of all franchising is the licensing of a trademarked

2. A standardized product or service together with a trade-

Perhaps through indoctrination, but more so because of a lack of

frequently speak of their relationship with their franchisees as being

more recently-officer, director, majority stockholder, and minority

from any contractual terms. 69 Thus the efforts of franchisors to disclaim

74 UNIFORMA COMMERCIAL CODE §§ 2-302, -306 (Official Text 1962).

Perhaps the most intriguing aspect of recognizing a fiduciary re-

Perhaps equity will at long last acknowledge the basic principle

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