Franchising and the Law: Navigating the Waters of Vicarious Liability

The franchise structure, a critical element of the worldwide commercial ecosystem, encompasses a multitude of enterprises. More than 780,000 franchised units operate in the United States, employing about 8.3 million people.[1] Approximately one of every twelve businesses in the United States is a franchise business, and forty percent of all retail sales can be attributed to the franchise industry.[2] Despite the magnitude and importance of franchising to our society, the legal subtleties of the bond between franchisors and franchisees, especially concerning vicarious liability, are intricate and layered. This piece explores the legal landscape of franchising and what entrepreneurs should consider.

What is Franchising, and How Does It Work?

A franchise is like a permission slip that a business owner (the “franchisor”) gives to another party (the “franchisee”).[3] This permission slip allows the franchisee to tap into the franchisor’s secret recipe of success, which includes a franchisor’s unique business tactics, processes, and even their established brand name.[4] The franchisee can thus sell their products or services using the franchisor’s well-known business name.[5] Of course, this doesn’t come for free. The franchisee usually has to cough up an initial fee and then continue to pay annual fees of various types as a sort of rent for using the franchisor’s business model and brand.[6]

What is Vicarious Liability? Vicarious liability is a tort theory that says that one owes an obligation because of their relationship with a particular party.[7] This is commonly applied in employer-employee relationships, where the employer is liable for the actions or inaction of an employee because of their position as their employer.

How Does Vicarious Liability Apply to Franchisor-Franchisee Relationships?

Vicarious liability is a tricky concept in franchising. Even though franchise agreements usually state that franchisors and franchisees are independent contractors, a franchisor can be liable if something goes wrong at a franchise. Agency law provides for two theories of vicarious liability: actual authority and apparent authority. An agent, in this case the franchisee, has actual authority to act on behalf of a principal, the franchisor, when they are given explicit or implied powers to do so.[8] Actions taken by an agent within the scope of their actual authority bind the principal, making them legally accountable for the consequences of those actions. Apparent authority exists when a third party reasonably believes, due to the principal’s conduct or representations, that the agent possesses the authority to act on the principal’s behalf, even if the agent lacks actual authority.[9] This, too, binds the principal.

Actual authority can be established in two ways, both of which revolve around the control that a franchisor has or theoretically has over the franchisee. One way is by demonstrating that a franchisor had a right to control the franchise, as stated in the franchise agreement. The second way is through a franchisor’s actual exertion of control on a franchisee’s operations.

Case Law

Williams v. Jani-King of Philadelphia, Inc.

Williams v. Jani-King of Philadelphia, Inc. demonstrates the potential for franchisors to be deemed employers when they exert substantial control over franchisees.[10] In Williams, the plaintiff franchisees decided to take Jani-King, the franchisor, to court.[11] The plaintiffs claimed that they and their fellow franchisees were wrongly classified as independent contractors when they should have been treated as employees.[12] The court found that Jani-King exerted substantial control over its franchisees, enough to be deemed their employer.[13] The court focused on the multifactor test used in Pennsylvania to distinguish between employees and independent contractors.[14] The key factors include the control of the manner that work is to be done, responsibility for the result, terms of the agreement between the parties, the nature of the work, the skill required, who supplies the tools, payment method, whether the work is part of the regular business of the employer, and the right to terminate the employment.[15] The paramount factor in this test is the right to control how the work is accomplished.[16] The court noted that Jani-King dictated many aspects of the franchisees’ operations, including their equipment, dress code, and interaction with customers.[17] Jani-King also had the power to inspect the franchisees’ work and could enforce compliance with its standards.[18] The court emphasized that the right to control, rather than actual control, is most important in determining employment status.[19] The court found that these factors pointed to a level of control that went beyond the typical franchisor-franchisee relationship, tipping the scales towards an employer-employee relationship.[20]

Patterson v. Domino’s Pizza, LLC

Patterson v. Domino’s Pizza, LLC highlights that franchisors aren’t automatically liable for misconduct within a franchisee’s store, especially when the franchisee distinctly manages day-to-day operations.[21] In Patterson, a female Domino’s Pizza store employee claimed her supervisor sexually harassed her. [22] The store employee decided to sue not just her supervisor and the store but also Domino’s as the franchisor.[23] She argued that Domino’s, as franchisee and franchisor, should be vicariously liable for the supervisor’s misconduct.[24] The court sided with the franchisor, pointing out that even though the brand had advised the store, it didn’t mean they were controlling the store’s daily operations.[25] The court applied the “means and manner test” to assess the franchisor’s liability, concluding that the franchisor wasn’t liable for the franchisee’s employee’s actions due to the franchisee’s day-to-day control over its employees despite the franchisor setting broad operational standards.[26] The franchise agreement made it clear that local personnel issues were the store’s responsibility.[27]

Ketterling v. Burger King Corp.

In Ketterling v. Burger King Corp., the court emphasized that franchisors aren’t vicariously liable for incidents at a franchisee’s location when the franchise agreement clearly delineates operational responsibilities.[28] In Ketterling, the plaintiff, a customer at Burger King, suffered injuries after slipping and falling on snow in the Burger King parking lot.[29] The plaintiff sought to hold the Burger King Corporation, the franchisor, accountable alongside the individual franchisee.[30] The plaintiff argued that the franchisor’s control over its franchisees was so extensive that it blurred the lines between franchisor and franchisee, making the former liable for the latter’s actions or, in this case, inaction.[31] While setting brand standards and guidelines, Burger King pointed to the franchise agreement, which explicitly stated that day-to-day operations and safety protocols, like shoveling snow, were the franchisee’s responsibility.[32] The court examined the degree of control Burger King exerted, from employee training to store maintenance and safety protocols.[33] The court concluded that while Burger King set brand standards, it did not micromanage daily operations to an extent that would render it vicariously liable.[34] The franchise agreement, which clearly delineated the responsibilities and operational boundaries, was pivotal in the court’s decision.[35]

The court also considered apparent authority.[36] While the franchisee’s restaurant operated under the Burger King brand and utilized its trademarks, this alone is insufficient to establish apparent authority.[37] The mere fact that a business operates under a franchised brand does not automatically mean that the franchisor is liable for the franchisee’s actions.[38] Franchisors are generally successful in defending themselves against such claims by arguing that it is “common knowledge” that franchisees operate independently and the franchisor shouldn’t be held responsible for their actions.[39] The court followed that principle in holding that the franchisee did not have apparent authority to bind the franchisor.[40]

The intricate balance of control between franchisors and franchisees is pivotal in determining legal responsibilities, as showcased by cases like Patterson, Williams, and Ketterling. While Patterson and Ketterling highlighted that broad operational standards do not necessarily imply liability, Williams showed that when a franchisor’s right to control extends to the specifics of the franchisees’ work, it can be deemed an employer. Ketterling also highlighted the pivotal role of franchise agreements in delineating the boundaries of actual authority between franchisors and franchisees. These cases together demonstrate the complexity of franchisor-franchisee relationships and the importance of clearly defined roles and responsibilities in franchise agreements.

Ketterling also reiterates the significance of clear contractual definitions in safeguarding franchisors from liabilities arising from franchisee actions. Ketterling emphasized that mere brand association isn’t sufficient to establish apparent authority. For a franchisor to be held vicariously liable, specific conduct or representations beyond just brand usage must lead third parties to believe the franchisee is acting on the franchisor’s behalf. This case highlights the importance of clear contractual definitions and the public’s understanding of the independent nature of franchised businesses.

Considerations for Franchisors

Franchisors should tread carefully when navigating the intricacies of vicarious liability. While it’s essential to maintain brand consistency through broad operational standards, controlling daily operations can be a liability pitfall. The franchise agreements should be crystal clear, emphasizing the franchisee’s independent status and drawing a distinct line between franchisor guidance and franchisee autonomy. Moreover, while brand association is valuable, franchisors should be wary of actions misconstrued as direct control over franchisees, potentially increasing liability risks.

Considerations for Franchisees

Operating under an established brand comes with its perks, but franchisees should not forget their significant operational autonomy. This independence, while allowing flexibility in daily operations, also brings forth the responsibility of managing staff, ensuring safety, and addressing legal hiccups. Franchisees are the frontline defense against legal claims tied to their operations. Thus, having robust insurance coverage and maintaining open channels with franchisors is paramount. At the end of the day, while they benefit from the brand umbrella, franchisees are captains of their own ships, steering through the vast sea of business challenges.

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[1] Franchising Industry Facts, Franchise Lawyer, https://franchiselawyer.com/franchise-legal-resources/franchise-industry-facts (last visited July 14, 2023). [2] Id. [3] Adam Hayes, What is a Franchise, and How Does It Work?, Investopedia, https://www.investopedia.com/terms/f/franchise.asp (last visited July 24, 2023). [4] Id. [5] Id. [6] Id. [7] Vicarious Liability Definition & Legal Meaning, thelawdictionary.org, https://thelawdictionary.org/vicarious-liability/ (last visited July 14, 2023). [8] Julia Kagan, Actual Authority: What it is, How it Works, Investopedia, https://www.investopedia.com/terms/a/actual-authority.asp (last visited Oct. 10, 2023). [9] Id. [10] Williams v. Jani-King of Phila. Inc., 837 F.3d 314 (3d Cir. 2016). [11] Id. at 316. [12] Id. [13] Id. at 317, 325. [14] Id. at 320. [15] Id. [16] Id. [17] Id. at 317. [18] Id. [19] Id. at 320, 321. [20] Id. at 321. [21] Patterson v. Domino’s Pizza, LLC, 333 P.3d 723 (Cal. 2014). [22] Id. at 725. [23] Id. [24] Id. [25] Id. at 743. [26] Id. at 738. [27] Id. at 731. [28] Ketterling v. Burger King Corp., 272 P.3d 527 (Idaho 2012). [29] Id. at 528. [30] Id. [31] Id. at 533. [32] Id. [33] Id. [34] Id. [35] Id. [36] Id. [37] Id. [38] Id. [39] Robert W. Emerson, Franchisee Independence: Still Awaiting Customer Recognition, 15 N.Y.U. J.L. & Bus. 287 (2019), available at https://ssrn.com/abstract=3365355. [40] Ketterling, 272 P.3d at 533.