Identify the perfect franchise for you! Take our short quiz Take our free franchise quiz!
Identify the perfect franchise for you! Take our short quiz Take our free franchise quiz!

Franchisors Exposed to Liability Based on the Conduct of their Franchisees

Judge Gavel - Franchise Help

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.

Prospective Franchisees - The Financial Questionnaire

The first qualification considered and investigated is often the prospect's financial situation, so as a franchise applicant you will need to be familiar with the financial jargon that a franchisor may employ in their questionnaire.

Franchise Help Sits Down with Cleaning Franchise Oxi Fresh

Whenever we have a tough decision to make, we always look at our value statement and then make our decision. Every member of our team makes a point to follow our code of values in everything they do, whether they are scheduling appointments or in the field cleaning carpets. Our code of values is to be F.R.E.S.H.

Is There A Duty Of Competence in Franchising?

Think about the last time you hired a plumber or an auto mechanic, or a lawyer for that matter. Without asking, you probably knew that the person you hired owed you a legal duty to perform the job in a competent manner consistent with the standards of his or her profession. The same is true when you bought a new car or built a new house. You rightly expected that the seller would stand behind its responsibility.