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Friday, November 9, 2012

Franchisor Control and Liability Issues




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. 


Helpful Resources:

4 comments:

  1. Thank you for posting this article on franchisor control and liability issues. I am currently studying business law in salt lake city and I will be dealing with these type of issues. Do you know where I can read more about this subject? Thank you for your help!

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  2. The link at the bottom of the post is a helpful resource. If you are looking for more in depth case-law then feel free to contact one of the attorneys in our office in Salt Lake City and we can point you to some cases. Thanks for reading!

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  3. Really this information will become more useful for the all type of business man. For our business franchise are will gives great support for protecting the brand, goodwill, trademark and quality control of services and products.
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  4. Quite helpful information. Franchises are far more severe, best for someone who doesn't need to reinvest the whole cycle. The advantage of this severity and architecture is the brand of franchise that is well protected.

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    ReplyDelete