Liability of a Franchisor for Acts of a Franchisee

In a franchise relationship, the franchisee buys the right to use the franchisor’s:

• Trademarks;
• Reputation;
• Trade secrets;
• Copyrights; and
• Marketing and service information in selling a product.

Whether the franchisor can be held liable for the actions of the franchisee in running the business largely depends on the degree of control that is retained by the franchisor in terms of the operation of the business.

If the franchisor has a strict set of policies dictating the day-to-day operation of the franchise, there is a high degree of control. As such, the franchisor may have liability for the damages associated with the franchisee’s implementation of the policies.

However, some courts determine agency by focusing on control over the instrument of harm. An example of this would be if a customer finds a foreign object inside their meal at a fast food franchise. If the customer can show that the franchisor controlled the meat processing and food serving, the franchisor would be held liable.

In cases in which a high degree of control exists, the franchisee may be considered an agent of the franchisor, thereby creating liability.

What Is The Scope Of An Agency Relationship?

An agent is someone who agrees to represent another person. The person that the agent is representing is called a principal. An agency relationship is generally formed by an agreement between the two parties, and an agent can only act on behalf of a principal for specific issues depending on the agreement.

An agent essentially acts as an employee, with the difference being that the agent works with the principal by representing the principal in specific transactions and situations. Additionally, the agent is given different types of power and authority, in order to act on behalf of another person or a group of people in a business setting.

A principal agrees to have another person (an agent) act on their behalf under specific circumstances. The principal has the right to completely control the agent’s conduct as it relates to the duties given to the agent by the principal.

Principal-agent relationships are important because agents can enter into binding contracts on behalf of the principal. However, even when a principal-agent relationship exists, the agent must have the authority to enter into such contracts for the principal. In order for an agent’s contract to be binding on the principal, the agent must be acting within the scope of an agent’s authority.

The agent must have at least one of the following types of authority:

• Express Authority: Express terms may be specifically stated in a written contract between the principal and agent. An example of this would be how the principal may state in the contract, “I authorize ________ to sign all documents associated with sales transaction #34.” Express terms may also expressly limit the agent’s authority in the contract;
• Implied Authority: Implied authority may result from the agent’s conduct and actions, or if the agent is performing conduct that is generally identified as authorized by the principal either traditionally or through custom. An example of this would be how an agent who is expressly authorized to fix computers may be implicitly authorized to purchase computer parts that are necessary to make those repairs;
• Apparent Authority: An agent has apparent authority when a third party believes that the agent has the authority to act for the principal; meaning, the focus is on whether the third party believes that the agent has authority to act on behalf of the principal. An example of this would be how if the agent is performing the specific task at the time specified for the task, while wearing an ID badge and uniform issued by the principal, it may be implied that they are acting on the principal’s authority; or
• Ratification: The principal does not know and did not authorize the agent to enter into the contract, but the principal accepts the benefits of the contract upon discovering the agreement.

When Is An Agency Relationship Formed In A Franchise Relationship?

The franchisor is liable for the actions of the franchisee’s employees if the franchisee is an agent of the franchisor. However, the employee’s actions must be within the scope of employment, in addition to the franchisee being an agent of the franchisor in order for the franchisor to be liable.

It is important to note that an agency relationship is not automatically created by a franchise agreement. Some examples of actions that could be evidence of an agency relationship include, but may not be limited to:

• Shared profits instead of royalty payments;
• Standardized training methods for employees;
• Building and maintaining a facility in the manner specified by franchisor;
• Strict rules of operation;
• The ability of franchisor to cancel the agreement if rules are violated;
• Regular inspection of the facility and operation by the franchisor;
• Prices are fixed by the franchisor; and
• Any actions that deprive the franchisee of independence in terms of business operation.

Some courts have created stronger requirements in order to establish an agency relationship, including control over the physical work. As such, they have held many of the factors above as only general business advice.

In the franchisor-franchisee relationship, the franchisor generally holds more money than the franchisee. If the franchisor is held liable, the plaintiff could collect more money from the franchisor than from the franchisee. There are some instances in which the plaintiff could take legal action against both the franchisor and the franchisee.

What Else Should I Know About Agency Relationships And Liability?

An agent has several duties towards the principal, and failure to perform these duties can result in a breach of contract or tort liability. An agent’s duties generally include:

1. Loyalty: An agent must only act for the benefit of the principal, and should not act for personal gain. Any information associated with the agency relationship should be kept confidential;
2. Performance: The agent must perform for the principal in an acceptable manner, meaning that the agent should perform their duties with reasonable skill and responsibility;
3. Notification: Also known as the duty to inform, an agent must inform the principal of all matters concerning the subject matter of the agency relationship; and/or
4. Obedience: An agent must act as the principal instructs, and should not act without the principal’s permission. One exception would be how if a principal asks the agent to violate the law, the agent can refuse without breaching this duty. Another exception would be that an agent can deviate from a principal’s instructions during emergency situations.

A principal has duties towards their agent, and failure to perform these duties can result in a breach of contract or tort liability. A principal’s general duties include:

• Compensation: Because a principal hires an agent, the agent expects payment to be made in a reasonable manner. A principal must also pay any out-of-pocket expenses that an agent incurs while performing their duties for the principal;
• Cooperation: A principal must allow an agent to perform their duties, and a principal must cooperate with and assist an agent as needed; and
• Safe Working Conditions: A principal must provide an agent with safe working conditions.

Do I Need A Lawyer For Issues With Franchisor Liability?

The concept of vicarious liability of franchisors can be especially complex, and can vary considerably from state to state. An experienced business attorney can help you determine your rights and obligations under a franchise agreement, or help you to create an agreement.

Additionally, an attorney will also be able to represent you in court, should your issue necessitate legal action.