analyzes the formal legal structure of franchising, focusing specifically on the contents of writtenfranchise contracts. Section III then moves to the economics of franchising, elucidating thefundamental economic features of the relationship and its attendant bargaining and commitmentproblems. Section IV shifts to the informal content of the franchise relationship. Here, the paper extracts “relational” norms of franchising relevant to dispute resolution. Section V examines thenature of the franchising disputes that courts resolve, relying on the institutional, relational, andeconomic analyses of the previous sections to illuminate the problematic features of these disputes.Section VI critiques the current method of resolving these disputes and analyzes how a relationalapproach to contract interpretations can aid in their resolution.I. THE FRANCHISING INDUSTRYA.
The threshold problem of defining “franchising” plunges us immediately into the complexity of thismodern organizational form. Franchising is a method of structuring a productive relationshipbetween two parties in which both contribute to the production or distribution of the product or service.
There are, of course, many such relationships. Here I consider the continuum of suchrelationships along two key dimensions: ownership and control.
At one end of the continuum is the ordinary employment in relationship, representing aconcentration of both ownership and control. In the typical employment relationship, the employer owns essentially all of the assets that produce the fruit of the relationship (except for the employee’spersonal assets) as well as the products of the relationship, either tangible goods or revenues. Inaddition, the employer exercises complete control; she decides what actions both parities will takein the course of the relationship and how the assets of the relationship will be employed. At theother end of the continuum is the ordinary, independent contracting relationship, representing adiffusion of both ownership and control. In this relationship, the parties each own some of the assetsthat contribute to production. Both parties exercise control as independent decision makers withrespect to their own assets and actions. The contract creating the relationship sets out concreteobligations on the part of both individuals, which will, of course, influence how each exercisesauthority.As is readily apparent from the definition of these endpoints, relationships can quickly blend into acombination of the two. Sometimes an employment contract objectively defines specific employeeobligations, making the employee more of an independent contractor along the control dimension:The employer is no longer free to determine employee actions. In comparison, the independentcontractor becomes more like an employee along the ownership dimension when the only assetsowned by the contractor are personal assets, such as a consultant’s know-how, or along the controldimension when the obligations created by the contract grant the other party significant discretionover the contractor’s actions.Franchising relationships characteristically lie in the intermediate range between employment andindependent contracting. With respect to control, franchising relationships are closest to theemployment end of the continuum: the franchisor typically exercises significant amounts of relativelyunrestricted decision making authority.
With respect to ownership, however, franchising is muchcloser to the independent contracting model: the franchisee typically owns the bulk of the assetsthat contribute to producing the fruit of the relationship. Often the franchisor contributes nothingbeyond the design for the product and relationship, perhaps represented by a trademark, andorganizational capital.
A “pure” franchising relationship would be one in which ownership residedcompletely in the franchisee and control completely in the franchisor. This characteristic allocation