Franchisors Exposed to Liability Based on the Conduct of their Franchisees

Recently there have been resolutions in a number of important lawsuits brought by consumers and employees against franchisees and franchisors based upon allegedly wrongful conduct occurring at the franchise level. These lawsuits, based on the theory of “vicarious liability,” shed light on important issues for franchisors to consider when structuring relationships with their franchisees and in getting involved with customer and employee relations at the franchise level.

In one case, the Jackson Hewitt Tax Service franchise is facing a lawsuit in Pennsylvania brought by an employee of one of its franchised tax service centers. The employee alleged that the franchisor was vicariously liable for the franchisee’s alleged misconduct due to its prescription of employment policies and exercise of control over the franchisee. The presiding court held that these allegations were sufficient to support a finding of liability against Jackson Hewitt.

In a case involving a 7-Eleven franchise customer’s complaint regarding illegal calling cards, a California federal court ruled that the customer’s allegation concerning the franchisor’s imposition of standards and controls on its franchisees was sufficient to allow the customer to proceed with its claim.

Most recently, a state court in North Carolina held that facts asserted by a customer of a franchised pool construction business were sufficient to establish an “apparent agency” relationship between the franchisee and franchisor sufficient to create potential vicarious liability for the franchisor. This was true even though the franchise agreement expressly disclaimed any actual agency relationship between the parties.

Facts that have been considered relevant to whether a franchisor might be exposed to vicarious liability regarding the conduct of its franchisees include:

• Representations made on the franchisor’s website that obfuscate ownership of the franchised business.
• Terms of customers service contracts that identify the franchisor as a responsible party.
• Statements made by the franchisee concerning its affiliation with the franchisor.

In addition, the language of the franchisor’s Operations Manual and Franchise Agreement may also be relevant to the analysis. Generally speaking, when a franchisor exercises too much control over a franchisee’s operations or becomes too involved in the customer or employee relationship, it becomes at risk for vicarious liability claims arising out of the conduct of its franchisees. Steps franchisors can take to help mitigate the risk of vicarious liability include:

• Thoroughly training franchisees on how to differentiate between themselves and the franchisor.
• Imposing contractual obligations and limitations on franchisee’s representations to customers.
• Carefully drafting form contracts.
• Carefully tailoring and circumscribing Operations Manual provisions concerning guidelines and obligations.

By taking these and other legal precautions, franchisors can help to proactively limit their potential exposure to liability for the conduct of their franchisees. Franchisors who fail to do so are taking on unnecessary risk, with potential burdens that can effect both the franchisor’s operations and the franchise system as a whole.

Jeff Fabian is the owner of Fabian, LLC, a boutique intellectual property and business law firm serving new and established franchisors and franchisees. Contact the firm directly at 410.908.0883 or jeff@fabianlegal.com. You can also follow Jeff on Twitter @jsfabian. This article is provided for informational purposes only, and does not constitute legal advice. Always consult an attorney before taking any action that may affect your legal rights or liabilities.