Monday, August 6, 2012

Vicarious Liability and Franchisors

A rising concern for franchisors is being found vicariously liable for the acts of its franchisees. Previously, when a franchisor was sued, the franchisors could cite the fact that the franchisee’s business was “independently owned and operated” from the franchisor’s business to be removed from the lawsuit during summary judgment and escape being dragged into trial to determine liability. However, in the last 20 years courts have looked to the controls of the franchisor over the franchisee’s business to deny summary judgment and allow a jury to find the franchisor vicariously liable.

This leads the franchisor with the unclear position of trying to determine how best to keep its system uniform and protect its trademarks through controls and yet not cross over this hazy line to be found vicariously liable.

The nature of the franchise business is a long term relationship that needs uniformity and flexibility. To meet these objectives, most franchisors exercise controls through an operations manual. The courts not only look at the franchise agreement to determine liability, but they also look to the operations manual. This is a very broad test of control. The concern about such a broad control test is that almost every franchisor has very significant controls through their operations manual in order to maintain uniformity and protect their marks.

Recently, some courts have been more specific about the controls they look at to determine vicarious liability. The controls must be related to the matter that was the cause of the injury. Just because the franchisor gives guidance and controls over a majority of the franchisee’s business, that is not enough, unless the franchisor had the right to control the particular activity giving rise to the claim. Even if the franchisor gives direction and guidance regarding the direct activity that caused the injury, there may be some additional hope for the franchisor. In Ketterling v. Burger King Corporation the fact that Burger King’s operations manual specifically stated that the franchisor did not have control over the day to day operations of the franchisee made the court find that the franchisor could not be vicariously liable and allowed summary judgment.

When drafting an operations manual, the franchisor should consider the following:

1)         Does the control lead to an obvious potential vicarious liability claims? If so, consider the following question.

2)         Are the controls necessary for protecting the franchise system and trademarks? If not, the franchisor may not want to include such controls. If so, the franchisor should consider the following question.

3)         Does the operations manual clearly and concisely state that the franchisor does not control the day to day operations of the franchise business? If not, the franchisor should include this in the operations manual and in the franchise agreement.