Seven Strategic Steps to Avoid Franchisor Liability

by Jaburg Wilk
Contact

One of the hallmarks of franchising is consistency of the brand and operations across the franchise system. If well executed, that consistency gives the  public the impression that the franchise system is a centrally-owned operation. Most people don't know the difference between business operations that are centrally owned and those that are franchises. In fact, most people erroneously assume that certain centrally-owned operations are franchises and vice versa.

One of the key differences between centrally-owned operations and franchise systems is that franchised units are independently owned and operated by either mom & pop operators or large multi-unit operators. The franchisee is a "person" distinct from the franchisor, licensed by the franchisor to use its trademarks, proprietary information and other features of the franchise system. To maintain the good will of the franchise brand, the franchisor typically requires compliance with the features that make the franchise system unique and successful, as well as quality controls and standards. That "control" has led to claims that the franchisee's operations are in fact controlled by the franchisor and, therefore, the franchisor should be liable for the franchisee's operations.

With the rise in franchising over the years (despite the recent plateau due to the economy) and the increasing zeal of plaintiffs' lawyers (augmented by the economy), franchisors are increasingly being sued in connection with their franchisees' operations.  The "deep pocket" theory of recovery motivates plaintiffs' lawyers to sue the better-capitalized and better-insured franchisor in addition to the franchisee that may be responsible for the harm suffered by his or her client.

In cases seeking to hold franchisors "vicariously liable" for their franchisees' operations, courts have historically focused on whether the franchisor controlled, or had the power to control, the franchisee's business. More recently, courts have narrowed their focus to whether the franchisor controlled, or had the power to control, the particular instrumentality or activity causing the harm suffered by the plaintiff. A recent Arizona case, Courtland v. GCEP-Surprise, LLC, 119 Fair Empl.Prac.Cas. (BNA) 806 (D. Az. 2013), followed this trend. In that case, a Buffalo Wild Wings® franchisee's employee sued both the franchisee and the franchisor, claiming that the franchisee's manager's actions constituted sexual discrimination, harassment and retaliation. The court found that, although the franchisor imposed strict guidelines on the franchisee's restaurant's manner of presentation and operations, the franchisor had no control over the franchisee's management or its employees' conduct. Accordingly, the court held that the franchisor was not liable for the franchisee's manager's actions.

Although the Courtland case does not break any new ground, it is a firm reminder of the advice that experienced franchisor lawyers have long been giving their clients:

1. The franchise agreement should disclaim a principal-agent relationship between the franchisor and the franchisee and affirmatively state that it is the franchisee's right and obligation to hire, fire and supervise its employees.

2. The franchise system design should be consistent with those franchise agreement provisions and the franchisor should act in a manner consistent with those provisions. The franchisor should mandate the standards of performance with respect to product and service presentation and standards of operation, which should be results-oriented, but not mandate the means of performance. Human resources (HR)-related issues should be left to the franchisee. For example, franchisees should have the latitude to hire, fire, supervise, discipline, assign work, set schedules, establish working conditions and determine the rate and method of compensation, perquisites and vacation policies. Direction with respect to the means of performance should be recommendations or advisory only, not mandatory. For example, a franchisor might require its franchisees to comply with applicable law with respect to its employees and provide its franchisees a template employee manual. However, a wise franchisor would direct its franchisees to consult its own local lawyer for advice on how to comply with applicable law with respect to its employees and tailor the employee manual to reflect applicable local law and HR-related policies adopted by the franchisee.

3. The franchisee's corporate or LLC name should not include the franchisor's name or the name of the franchise brand. The franchisee's marketing brochures and related materials, business cards, stationery, payroll and other checks, purchase orders, invoices, contracts and other documents should be in the name of the franchisee, not the franchisor or the franchise brand. For example, a business card might include the franchisor's logo, but have the franchisor's corporate or LLC name. A contract might refer to the franchisee as "XYZ Inc. doing business as the franchise brand name."

4. The franchisor should require that the franchisee post a conspicuous notice informing its customers and guests that the franchisee's operations are owned and operated by the franchisee, not the franchisor. The franchisor should monitor the franchisee's compliance with this requirement on an ongoing basis.

5. The franchisor should not unnecessarily assume responsibility for certain of the franchisee's operational duties by reserving the right to control certain activities (particularly activities that entail significant legal exposure), but failing to do so or failing to exercise reasonable care in discharging those duties. For example, if a franchisor required that franchisees comply with the franchisor's premises security policies, but failed to adopt those policies or adopted inadequate policies, the franchisor might be responsible for the harm suffered by franchisees' customers or guests. A wise franchisor would require that its franchisees provide adequate security and refer the franchisee to third parties specializing in designing that function for the franchisee's particular unit or providing that service.

6. The franchisor should take the necessary steps to ensure that the risk associated with the franchisee's operations remains with the franchisee. For example, the franchise agreement should contain appropriate indemnification and contribution provisions. The indemnification provision should permit the franchisor to engage its own lawyer in defending against a claim based upon the franchisee's actions, as the franchisor's and franchisee's interests in such litigation are not the same and having separate counsel is consistent with the franchisor's position that it is distinct from the franchisee.

7. The franchisor should require the franchisee to maintain adequate and appropriate insurance policies with financially sound carriers, with the franchisor named as an additional insured on those policies, with a waiver of subrogation with respect to the carrier's claim against the franchisor and without an exclusion for claims between insureds.

Although it is a statistical probability that a franchisor will at some point be subject to litigation, it is a wise franchisor who strategically takes the steps necessary to reduce the statistical likelihood of litigation and enhance its likelihood of success in that litigation.

Written by:

Jaburg Wilk
Contact
more
less

Jaburg Wilk on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.