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Liability of Franchisors Arising Out of Agency Relationships

An increasing array of goods and services are offered through “franchises.” Franchising is not a new concept, but it has exploded in popularity; according to statistics compiled by Price Waterhouse Coopers in 2005 (the latest year for which data was available), franchising is a business model used in over 70 industries in the United States which generates over $2.3 trillion in U.S. sales annually. In a franchise arrangement, entities with a nationally recognized name enter into relationships with others to market goods and/or services under the recognized name.

The entity with the recognized name is the “franchisor” and the actual seller of goods and/or services is the “franchisee.” The relationship is usually detailed in a franchise agreement between the parties. Commonly, the franchisee is a separate and independent entity, with the franchisor exercising varying degrees of control over the activities and the goods and/or services offered.

“Agency” Liability

Many courts and legal authorities believe that those injured as a result of the wrongful actions of others should be made “whole,” or in other words, restore the victim to the same condition or position they were in prior to the injury. As wrongful acts are often committed by those who are unable to pay a judgment, courts and attorneys have expanded the scope of liability to include others connected to the wrongdoer with the greater ability to pay, often called “deep pockets.”
One method of expanding the scope of liability has been through the principle of “agency.”

It has long been established that employers may be held vicariously liable for the wrongful acts of their employees committed in the course of employment, under the doctrine of respondeat superior, i.e., the master must answer for the actions of a servant. As one court has put it, vicarious liability is a form of liability without fault; imposition of liability on an innocent person for the wrongful conduct of another based on the existence of an agency relationship. It is generally imposed, however, only where the “principal” (such as an employer) has control of, or the right to control, the conduct of the “servant”(employee).

Franchisor Liability Based on Agency Relationships

Courts have extended the principles of vicarious liability to franchisors, over the objections of franchisors that extending liability is inappropriate, since franchisees are usually independent entities. An individual injured at a franchise location or as a result of the products or services provided, may, under certain circumstances, bring an action against the franchisor as well as the franchisee.

For example, a franchisee of Arby’s Inc. in Wisconsin hired a work release inmate (i.e., an inmate granted the right to work outside the prison). The inmate walked off the job and crossed the street to a Wal-Mart, where he waited for, then shot, his former girlfriend and her fiancĂ© before committing suicide. The fiancĂ© died and the woman survived, suffering severe impairment as a result of her injuries. Arby’s was sued along with the franchisee.

The 2004 Wisconsin Supreme Court opinion in the case surveys various state cases on imposing franchisor liability based on franchisee agency. The court concluded that, in general, a franchisor may be held vicariously liable for the tortuous conduct of its franchisee (in this case, negligence in hiring and supervising the inmate) only if the franchisor has control or a right of control over the daily operation of the specific aspect of the franchisee’s business alleged to have caused the harm. After examining the franchise agreement, the Court concluded that Arby’s had little or no control over hiring and supervising, and therefore could not be held vicariously liable. Similarly, a 2000 New York court decision refused to extend liability to Dunkin’ Donuts when a franchisee employee was severely injured in a robbery, as the franchisor did not control the security at the franchise location.

An Oregon case, however, held that McDonald’s could be held liable for damages that resulted when a sapphire was found in a “Big Mac” at a franchisee restaurant. Similarly, a federal court in Illinois certified a class action by males against the restaurant franchisor Hooters Inc., as well its franchisees, for sexual discrimination in refusing to hire male employees. The court found that Hooters Inc. controlled the chain’s “core concept” of females waiting tables wearing cut-offs, tank tops, and orange jogging shorts, and thus could be held vicariously liable.

Apparent Agency as a Basis for Franchisor Liability

The existence of an agency relationship, however, is not the only basis courts have used to impose liability on franchisors. In some states liability based on “apparent” or “implied” agency has been allowed. Agency liability focuses on the actual relationship, while apparent authority examines what the victim “reasonably believed” based upon circumstances, such as the actions of the franchisor and franchisee.

Under this theory, the franchisor is prohibited (“estopped”) from denying the agency relationship and the authority of the franchisee to act for the franchisor because of its conduct. Factors necessary to establish apparent authority differ among states, but may include:

  • The franchisor represented to others that the franchisee was acting on its behalf, or the franchisor consented to, or knowingly acquiesced to, a franchisee’s exercise of authority.
  • A third party reasonably relied on the representation or had a good faith belief that the franchisee had the right to exercise authority for the franchisor.
  • As a result of the reliance, the victim acted and was damaged.

In a 1993 case, the Illinois Supreme Court allowed a victim of medical malpractice to sue a hospital for the actions of an emergency room doctor, whom the hospital claimed was an “independent contractor.” The court found factors indicating the hospital had held the doctor out as its employee, hence “apparent agency” applied. In a later case, a patron of a McDonald’s restaurant slipped on water or ice in the bathroom. The court allowed the case to be dismissed, but affirmed that a plaintiff may sue the franchisor where reliance on apparent agency can be shown.

In a 1995 decision, however, the Florida Supreme Court upheld judgment for Mobil Oil Corporation when a patron of a franchisee filling station was attacked and severely beaten by the franchisee’s employee. The Court found there was not even a “minimum level of apparent authority” as a basis for Mobil liability, despite the required use of Mobil symbols and logos by the franchisee, the selling of Mobil products, and the Mobil logo on the employee’s uniform.

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