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 held liable for the actions of the franchisee in running the business depends on the degree of control retained by the franchisor over the operation of the business.
If the franchisor has a strict set of policies for the day-to-day operation of the franchise, there is a high degree of control and the franchisor may have liability for the damages that result from the franchisee’s implementation of the policies.
However, some courts will find agency despite day-day operation control not being strong. Instead, they may focus on control over the instrument of harm. Suppose that a customer finds a finger inside a hamburger at a fast food franchise. If the customer can show that the franchisor controlled the meat processing and food serving, the franchisor would be liable.
In cases where a high degree of control exists, the franchisee may be looked at like an agent of the franchisor, creating liability.
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 for the franchisor to be liable.
An agency relationship is not automatically created by a franchise agreement. Some actions that could be evidence of an agency relationship include:
- Shared profits instead of royalty payments;
- Standardized training methods for employees;
- Building and maintaining facility in manner specified by franchisor;
- Strict rules of operation;
- Ability of franchisor to cancel agreement if rules are violated;
- Regular inspection of facility and operation by franchisor;
- Prices fixed by franchisor;
- Any actions that deprive franchisee of independence in business operation.
Some courts have created stronger requirements to establish an agency relationship, including control over the physical work, and have held many of the factors above as only general business advice. A lawyer can help you determine the law in your area.
In the franchisor-franchisee relationship, the franchisor typically holds more money than the franchisee. If the franchisor is liable, the plaintiff could collect more money from the franchisor than from the franchisee. In some cases, the plaintiff could go after both parties.
The rules regarding vicarious liability of franchisors can be complex and vary from state to state. An experienced business attorney can help you determine your rights and obligations under a franchise agreement or help you in creating an agreement.
If you have been injured at a franchise, an experienced personal injury attorney will be able to advise you of your rights, as well as help you obtain a remedy.