Franchisor Liability for Actions of Franchisees
November 12, 2008
Cynthia Klaus, a Shareholder in Larkin Hoffman’s Franchise and Distribution practice group, collaborated with two other attorneys to present a workshop which addressed ways in which franchisors can take steps to protect itself from vicarious liability claims. Vicarious liability claims arise when plaintiffs bring suit against a franchisee, based on a variety of tort and statutory theories, and also attempt to hold the franchisor responsible based on an agency. An agency relationship can be found between a franchisor and a franchisee when either (i) the franchisor exercises sufficient control over the franchisee’s day-to-day operations; or (ii) the franchisor represents that the franchisee is its agent, or allows the franchisee to represent that it is the agent of the franchisor, and the plaintiff justifiably relies on this representation.
Day-to-day control is typically inherent in franchise systems, as franchisors desire to impose uniform standards on franchisees both to maximize potential, and to protect their brand. Thus, a balancing act must be struck between establishing uniform standards and exerting the type of control that may lead to vicarious liability.
Recently, courts have begun to modify the test used to determine whether the franchisor exerts a sufficient amount of control over the franchisee in order to be held vicariously liable. Courts have begun to examine whether the franchisor exerts control over the specific aspect of the franchisee’s business that is alleged to have caused the harm, as opposed to simply examining whether the franchisor has the right to exercise control over the franchisee’s operations.
For example, in a recent case, an employee brought suit against its franchisee employer after being attacked by intruders while working an overnight shift. The court refused to extend vicarious liability to the franchisor, because the franchisor’s operations manual or other system standards did not have an express provision requiring the franchisee to implement the franchisor’s safety and security policies. In general, when a franchisor recommends policies to its franchisees, rather than requiring them, it can avoid many types of vicarious liability.
Cynthia Klaus and her co-presenters highlighted some practical issues that franchisors should keep in mind when dealing with vicarious liability cases, some of which are set forth below.
• Franchisors and franchisees both should work to dismiss the franchisor from the lawsuit, and have a unity of interest in doing so. Dismissing the franchisor from the lawsuit reduces the media exposure, as well as the deep pockets of a corporate defendant, and thus, the settlement or potential verdict value. In many cases, plaintiffs may actually be amenable to dismissing the franchisor from the case. Sometimes, the franchisor is named in a lawsuit because the plaintiff’s attorney is not aware that the location is a franchised business. In other cases, plaintiffs may be put off by the prospect of dealing with an additional set of lawyers and summary judgment motions. Many times, a letter to the plaintiff’s attorney stating that the franchisor does not own or operate the location at issue, and that vicarious liability does not apply under the particular set of facts, may be enough to convince the plaintiff’s attorney to dismiss the franchisor from the case. However, if such a letter does not work, the franchisor should consider obtaining an affidavit from the franchisee stating that the franchisor lacks day-to-day control and pursuing a motion to dismiss or summary judgment.
• Franchisors and franchisees should consider joint representation when defending against a suit of direct liability against the franchisee, and vicarious liability against the franchisor. The involvement of one set of lawyers can ease the flow of communication between the parties, and help to ensure that such communications are not subject to discovery by the plaintiff. Additionally, the franchisor and franchisee can come up with one strategy of overall defense against the claim. However, conflicts may arise when the franchisor and franchisee have different perspectives and goals in the litigation, and in this case, separate counsel should be obtained.
• Disputes between the franchisor and franchisee should be reserved until after the trial. Many times the franchisor will have an indemnification claim against the franchisee, or there may be cross-claims between the parties regarding which party is actually responsible for the harm. However, finger-pointing among the defendants is likely to only confuse and anger the jury, and may lead the jury to return a verdict against one or both of the defendants.
• Having an approved insurance carrier program helps to align the interests of the defendants. Many times, the franchisee’s insurer will actually be involved in the defense of the lawsuit, and will impose certain requirements and restrictions related to the defense. An insurance carrier that represents only one franchisee does not have a financial incentive to protect the system, and only is interested in protecting that single franchisee. However, if a single insurance carrier insures a large number of franchisees in the system, this carrier’s interests will align with that of the franchisor in protecting the brand, and minimizing costs across the system. This carrier also has a financial interest in having the franchisor dismissed.
For more information or questions related to vicarious liability claims, and strategies for defending them, contact Cynthia Klaus, 952-896-3392, firstname.lastname@example.org, or James Susag, 952-896-1572, email@example.com, Shareholders in Larkin Hoffman’s Franchise and Distribution practice group.
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