Vicarious Liability

By: Jason Murray, Cynthia M. Klaus, and Heather L. Smedstad

Inherent in a franchise system is the tension between the franchisor’s obligation to protect the integrity of the brand by imposing uniform standards on independent franchisees, and the need to allow independent franchisees the flexibility to maximize the potential of their individual businesses. In asserting vicarious liability claims against a franchisor based on acts of its franchisee, a clever plaintiff’s attorney will try to exploit this tension, seeking to blur the line between enforcing a system of uniform standards and having day-to-day operational control over a franchised business.

How can a franchise system strike the right balance? Rule #1 is to understand the legal landscape, including the trend away from judging a franchisor’s control based simply on the fact that it has uniform system standards (as it must to police its brand under the Lanham Act) toward looking at the “instrumentality of the harm” to determine whether the franchisor had day-to-day control over that aspect of the franchisee’s operations that allegedly caused a particular plaintiff’s injury. Given this trend in the case law, Rule #2 is for the franchisor to pick its battles. If delivery of a particular standard is not central to the system’s brand promise, the franchisor may be better served by offering voluntary guidelines or suggestions in order to avoid even the appearance of day-to-day control. Conversely, if a standard is central to the brand promise (for example, food safety to a restaurant chain), then the balance may tip in favor of a more prescriptive approach to try to insulate the system from the occurrence of lawsuit-provoking, adverse events in the first place.

The good news is that vicarious liability claims present the franchisor and franchisee an opportunity to advance a common cause. For the most part, franchisors and franchisees have a shared interest in the franchisor’s dismissal from the suit as quickly as possible to reduce the potential financial and media exposure that attends the inclusion of a “deep pocket” corporate defendant. At trial, franchisors and franchisees generally remain aligned to defeat the plaintiff’s direct and vicarious liability claims, waiting until a later date to pursue potential indemnification or cross claims, if necessary. Consequently, a franchise system is well-advised to consider the implications of potential vicarious liability claims when designing and drafting its system standards and controls, rather than waiting for courts to resolve the tension.

This article provides an overview of the legal landscape for franchise vicarious liability claims, as well as practical tips for franchisees and franchisors dealing with such claims. In Part II, we discuss the two legal relationships that can give rise to vicarious liability–actual and apparent agency. In Part III, we discuss the tension in a franchise system between enforcing system standards and controlling the instrumentality that led to the plaintiff’s harm. How a franchisor’s conduct is characterized on that spectrum of control will likely determine whether or not the franchisor can be held vicariously liable. Part IV discusses the strength and effect of a franchisor’s disclaimer of agency and control, with some practical tips about how to bolster the effectiveness of such disclaimers. Part V describes some of the typical types of vicarious liability claims that franchisors face, including personal injury, product liability, sexual harassment, ADA, and recently, FACTA. In Part VI, we discuss some of the practical issues that arise from the franchisor and franchisee perspective in litigating a vicarious liability case. Finally, in Part VII, we discuss the important role insurance can play in managing these lawsuits.