One
area of a franchise system that must carefully be examined by franchisors is
the amount of control exerted over both franchisees and the franchise system.
Courts are increasingly finding ways to impose liability on the franchisor for
the actions or omissions of the franchisee. As a rule of thumb, a franchisor is
able to exercise the amount of control necessary to protect the brand,
goodwill, trademark and quality control of services and products. Overstepping
this can lead to devastating consequences.
When
examining the possibility of imposing liability on a franchisor, the courts
look at both the franchise agreement and
the actions of the franchisor. The greater the level of control in the
day-to-day operations or the details of the franchisee’s business, the greater
the likelihood of imposing liability on the franchisor. For example, becoming
involved in the hiring and firing of a franchisees employees can lead to
imposition of liability, dictating the exact method of how floors should be
cleaned, at what times and with which products can lead to liability, as can
having security cameras on the franchisee’s premises that the franchisor
continually monitors.
There
are generally three types of liability imposed: vicarious liability, liability
in a co-employer relationship, and liability in that the franchisor acts as the
actual business instead of the franchisee. For the last type of liability, the
courts looks at whether a franchisee can and will reasonably and justifiably believe
the franchisor actually controls the operations of the business, and not the
franchisee.
Avoiding
the above-types of liability and other possible liabilities requires a
franchisor to make careful considerations. Clearly maintaining a level of control
is a necessity in a franchise system. However, the issue of control and the
imposition of liability will continue to be a litigated issue. Franchisors
should exercise caution when expanding controls, and should speak with a
qualified franchise attorney to help them understand if the controls exerted
stay within the acceptable levels of control or if they carry with them the
possibility of liability.
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