Massachusetts is home to a number of successful national and international franchises. One need only drive about 10 miles in any direction and will certainly pass by a Dunkin’ Donuts or here in Boston, a chain hotel. Many of these locations are considered “independent franchisees”, or rather, stores and shops that license the right to use the franchisor’s intellectual property for a fee. An important issue arises when someone gets hurt on a franchisee’s premises or by a franchisee’s employee: Will the franchisor be vicariously liable for the franchisee’s alleged negligence?
Until this past summer, there was no clear answer to this question in Massachusetts, despite it being the home state of many national brand companies. A recent decision from the Supreme Judicial Court, Depianti v. Jan-Pro Franchising Int'l, Inc., 465 Mass. 607, 614 (2013), changed that, albeit indirectly. In Depianti, a cleaning and maintenance company based out of Georgia, Jan-Pro, sold franchisees the exclusive right to use the Jan-Pro name throughout a defined region of the country. An independent contractor of one franchise filed suit against the franchisee and the parent company, alleging misclassification as an independent contractor and other labor law claims. In its ruling, the SJC adopted the “control over the instrumentality” test established by Kerl v. Dennis Rasmussen, Inc., 273 Wis.2d 106, 125 (2004) with regard to the vicarious liability of a franchisor. In Depianti, the SJC stated: "[A] franchisor may be held vicariously liable for the conduct of its franchisee only if the franchisor controls or has a right to control "the daily conduct or operation of the particular 'instrumentality' or aspect of the franchisee's business that is alleged to have caused the harm."" (quoting Kerl at p. 129).
Now, Massachusetts courts will consider what control a franchisor has over the daily operation of the instrumentality which caused the complained of harm. If an employee caused harm by acting negligently, the court will look at the franchisor’s ability to hire, fire, train, and discipline the employee.
For example, a New York court denied a hotel’s motion for summary judgment, finding that although a guest fell on an independent franchisee’s premises in the Bahamas, the franchisor had some input on the decision of the carpet color, lighting, and menu location. The guest alleged that each contributed to the cause of the fall and the franchisee hotel had to ask permission to make any alterations. Toppel v. Marriott Int'l, Inc., 03 CIV. 3042 (DF), 2008 WL 2854302 (S.D.N.Y. July 22, 2008).
As you can see, the potential liability of a franchisor varies on a case-by-case basis. Not only will courts consider the control over the instrumentality test, they will also scrutinize two very important documents: the licensing agreement; and any franchise operations manual. If either provides the franchisor with specific controls over the day to day operations of the franchise, courts may determine that sufficient evidence exists for a vicarious liability claim to proceed to a jury. For example, a Florida court held that a Domino’s Pizza franchise manual controlled every step of the business process and therefore could subject the Domino’s Pizza corporation to a vicarious liability claim related to a delivery driver who caused a car accident injuring a third party. See Parker v. Domino's Pizza, Inc., 629 So. 2d 1026, 1029 (Fla. Dist. Ct. App. 1993).
There are many steps that a franchisor can take to best insulate itself from a vicarious liability claim. Franchisors should require that their franchisees obtain insurance which names the franchisor as an insured under the policy. In addition, there should be language in the licensing agreement stating that the franchisee acknowledges its independence and that the control over the day to day operations, including supervision, hiring, and firing of employees, is under the sole control of the franchisee. Nevertheless, it is expected that the franchisor will exercise some control over the franchisee. For example, to comply with the Lanham Act, franchisors must create rules and regulations related to the use of any registered trademarks and other licenses. Remember that it is anticipated that a franchisor will require all employees to be courteous and respectful to guests/customers and make safety a top priority. Thus, navigating this line between general expectations and control over the operations can be challenging.
As you can see, the agreements and materials created by franchisor corporations are critical to separating and protecting themselves from liability for their franchisee’s operations. If you would like more information related to this topic and how it could affect your business, or if you would like us to review your agreements and franchise manuals, we are happy to do so. Please do not hesitate to contact us.