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Third-party lawsuits against franchisors take a number of familiar forms. When a customer's car brakes fail after being serviced by a franchisee or a restaurant patron falls down the steps of a franchise-owned business or a customer of a car rental franchise dies in an accident, the ensuing lawsuit is often brought against both the franchisee and the franchisor.1 Franchisors are attractive targets for plaintiffs as they are often plaintiffs' only chance for a meaningful monetary recovery. In addition to presenting complex legal issues, these cases often involve sympathetic plaintiffs and no deep pockets other than those of the franchisor. As a result, these cases often present bad facts, which can lead to bad law.
Vicarious liability claims often surface in business format franchising where, in addition to obtaining the right to use a mark for a fee, the franchisee must comply with the franchisor's marketing strategies and programs, operations manuals, standards, and quality control requirements.2 Business format franchising invites vicarious liability claims because, by its nature, it provides consumers with a uniform experience at all system outlets. As such, consumers are unable to distinguish operational differences between a franchisor-owned outlet and a franchisee-owned outlet. But the uniformity of products and services that business format franchising breeds does not eliminate the legal distinction between franchisor and franchisee as each remains independent of the other: the franchisor focuses on developing the system and protecting the brand while the franchisee controls the day-to-day operations of the individual unit location. That said, although some amount of franchisor control over the franchisee's operations is necessary, too much control invites legal jeopardy.
This article reviews recent vicarious liability decisions and offers practical advice for franchisors on achieving a balance between retaining sufficient quality controls and avoiding vicarious liability for the actions or inaction of their franchisees. As noted below, the law has not altogether caught up with the economic reality of franchising, and many courts continue to apply concepts of traditional agency law derived from employer-employee relationships. Recent case law suggests that courts may be moving to an analysis of vicarious liability cases that reflects the realities of franchising.
The best remedies for franchisors are preventive. Suits against franchisors rarely proceed to trial, and many cases are decided on...