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The notion of vicarious liability should be foreign to the area of franchising. The premise of franchising is to provide a business format by which independent businesspeople can profit as a result of their own entrepreneurial business skills. Because franchising necessarily depends upon use of shared trademarks-and due to the necessity of assuring uniform quality standards-controls are essential in a franchise system. These controls should not be a pretext for imposing upon the franchisor all of the franchise system’s business risks and legal obligations. Indeed, to do so is contrary to the concept of franchising and the agreed allocation of business risks upon which the franchise business model is based. The cases are mixed in recognizing the unique aspects of franchising and the interplay of franchising and agency law. Some courts recognize the unique nature of franchising, holding that basic system controls are not sufficient to create an agency relationship. Others hold that these controls at least create issues of fact requiring resolution by a jury. What is clear is that this area continues to be unsettled, as franchisors find themselves exposed to possible liability for the act of their franchisees. The traditional test is the right to control day-to-day operations. One of the most encouraging cases for franchisors resisting vicarious liability comes from the Georgia Court of Appeals in Pizza K Inc. v. Santagata, 547 S.E.2d 405 (Ga. Ct. App. 2001). The plaintiff was injured by a franchisee’s pizza delivery driver. The trial court entered summary judgment in favor of the franchisor, and the appellate court affirmed. The appellate court’s decision contains wonderful language for franchisors. The court first observed that when applying the traditional agency test of control over “the time and manner of executing the work,” the court had to be “mindful of the special relationship created by a franchise agreement, for a franchisor who is faced with the problem of exercising sufficient control over a franchisee to protect the franchisor’s national identity and professional reputation, while at the same time forgoing such a degree of control that would make it vicariously liable for the acts of the franchisee and its employees.” Id. at 406. The Pizza K franchisor retained a full complement of controls over its franchisees. Acknowledging that the franchise agreement before it contained “specific and even strict requirements concerning operation of the franchise,” the court nevertheless found that the agreement did not give to the franchisor the right “to exercise supervisory control over the daily operations of Brookhaven’s employees.” Id. at 497. The right to conduct monthly inspections and require the use of certain bookkeeping forms “simply serve,” according to the court, “as a means of achieving a desired level of uniformity and quality within the system of Pizza K franchises.” Id. A recent case out of Florida, Font v. Stanley Steemer Int’l Inc., 849 So. 2d 1214 (Fla. Dist. Ct. App. 2003), illustrates how courts can look at the same indicia of control yet reach opposite conclusions regarding vicarious liability. In Font, the Florida appellate court overturned a summary judgment in favor of a franchisor on a vicarious liability claim based solely on the purported “multitude of facts” before it. The plaintiff, Patricia Font, was killed when her vehicle collided with a franchisee’s van. Despite an express provision within the franchise agreement providing that the franchisee was an independent contractor, the court held that the nature of the parties’ relationship could not be determined by descriptive labels employed by the parties themselves. The court acknowledged the franchisee’s independent ownership and control of the vehicle, the lack of any ownership interest by the Stanley Steemer company in the franchisee and the franchisee’s absolute control over employees. Nevertheless, it held that there were other controls sufficient to create an issue of fact on the question of actual agency. Id. at 1219. These included standard provisions existing in franchise systems, such as the imposition of start-up deadlines; the obligation to pay the franchisor licensing fees and royalty payments; specifications and procedures by the franchisor for operating the business; and the franchisor’s direction of training, advertising and cleaning methods. The court further noted that the van and carpet-cleaning machines were purchased pursuant to the franchisor’s specifications (size, color, appearance). The court found that their existence created issues of fact sufficient to require submission of the vicarious liability claim to the jury. Id. System controls In Miller v. McDonald’s Corp., 945 P.2d 1107 (Ore. Ct. App. 1997), the court likewise found the existence of common system controls sufficient to create an issue of fact on the question of agency. The plaintiff, Joni Miller, was injured when she bit into a heart-shaped sapphire while eating a Big Mac sandwich that she had bought at a franchised restaurant. The Oregon Supreme Court reversed the trial court’s entry of summary judgment in McDonald’s favor. The Oregon Supreme Court concluded that the franchise agreement did not simply set standards that the franchisee had to meet, but required that the franchisee use McDonald’s precise methods for the handling and preparation of food. In addition, the court observed that McDonald’s enforced the use of its methods by regularly inspecting stores. These factors were deemed sufficient to permit a jury to decide the question of agency. Traditional agency principles should not necessarily be the test. Control is the sine qua non of franchising. Indeed, a hallmark of any successful franchise system is substantial control by the franchisor over the franchisee, controls that any jury could conclude dominate day-to-day operations of the franchisee. These extensive controls are often manifested in the franchisor’s operations manual or system standards. Any court or jury that wants to construe liberally an operations manual can readily justify a finding of vicarious liability. Few franchisors can honestly take comfort that their controls are markedly different than the controls contained in the Stanley Steemer manual. After all, the objective of franchising is to make one franchised location indistinguishable from another. Unless the typical franchise relationship is to be deemed one of principal and agent as a matter of law, generalized control is not really a satisfactory test of vicarious liability. Perhaps aware of the deficiencies of the standard control test in a franchise setting, some courts have focused instead, and more narrowly, on a franchisor’s specific control over the injury-causing activity, something akin to a direct negligence case. The Texas Supreme Court in Exxon Corp. v. Tidwell, 867 S.W.2d 19 (Texas 1993), was asked by the plaintiff to apply traditional notions of vicarious liability focusing on control of day-to-day operations and to allow a jury to find Exxon liable for the acts of a service station operator. The plaintiff, Terry Tidwell, suffered gunshot wounds to his face and arm during the course of a robbery attempt at the franchised service station. A different inquiry The court refused to apply the traditional test of control over the details of the operation. The court reasoned, “It requires a fact finder to surmise a general right of control from factors unrelated to safety, and then to infer from that general control a right of control over the safety conditions that are the real issue in the case.” The court held, instead, that the relevant inquiry is control over the instrumentality resulting in the harm: “The focus should be on whether Exxon had the right to control the alleged security defects that led to Tidwell’s injury.” Id. at 23. Some courts outside of Texas have also applied the test. In Wu v. Dunkin’ Donuts Inc., 105 F. Supp. 2d 83 (E.D.N.Y. 2000), a franchisee employee was working the graveyard shift at a Dunkin’ Donuts store in Queens, N.Y., when two men brutally attacked her, repeatedly raping her and slashing her with a knife. She sued Dunkin’ Donuts, alleging a number of theories but relying principally upon control by Dunkin’ Donuts of security operations at franchised locations. The court defined the test for vicarious liability as turning on “whether the franchisor controls the day-to-day operations of the franchisee, and more specifically, whether the franchisor exercises a considerable degree of control over the instrumentality at issue in a given case.” Id. at 87. The court concluded that Dunkin’ Donuts had only made recommendations regarding safety and security at franchise locations and had not established any actual requirements as they relate to safety. Finally, the court found that holding Dunkin’ Donuts liable for the lack of safety and security at the franchise location because it had made recommendations would serve to discourage franchisors from offering advice to franchisees, an unworthy goal. The court granted summary judgment to the franchisor, a ruling affirmed by the 2d Circuit U.S. Court of Appeals. 4 Fed. Appx. 82 (2d. Cir. 2001). The 5th Circuit in Neff v. American Dairy Queen Corp., 58 F.3d 1063 (5th Cir. 1995), established a variation on the theme that the relevant inquiry is control over the injury-causing mechanism. The issue in Neff was whether a franchisor could be liable for its franchisee’s failure to comply with the Americans With Disabilities Act (ADA). The Neff court refused to base its decision on generalized rights of control set forth in the Dairy Queen franchise agreement, but focused instead on the franchisor’s actual exercise of control over compliance with the ADA. Indeed, the court suggested that only if the franchisor had somehow caused the franchisee’s noncompliance with the ADA would the franchisor qualify as an “operator” under the terms of § 302 of the act. The test applied was one that would have created direct liability under the act. The court declined to find such liability. Agency by estoppel Franchisors also find themselves defending claims of apparent agency, also called agency by estoppel. The premise is that the franchisor has purportedly held the franchisee out as its agent through national advertising and common trademarks, which has led the plaintiff to believe that the franchised operations are controlled and operated by the franchisor. Like the actual agency cases, the apparent agency cases go both ways, seemingly based on essentially the same facts. A helpful case for franchisors is BP Exploration & Oil Inc. v. Jones, 558 S.E.2d 398 (Ga. Ct. App. 2001). There, a patron brought an action after being pushed through a plate glass window by a service station employee. The victim alleged that the franchisor held the franchisee out as its agent through its national advertising campaign, which represented to the public that all BP stations were its own. The franchisor’s advertising campaign revolved around the slogan “BP, we keep you moving.” The appellate court affirmed summary judgment in favor of the franchisor. The court held that an apparent agency cannot be predicated on an independent contractor’s display of a national company’s trademark. Rather, the court stated, it is a matter of common knowledge and practice that distinctive colors and trademark signs are displayed by independent dealers. The court also ruled that a company does not open itself to liability merely by advertising its brand. Id. at 827. Other courts have held that the wording of an advertisement can create an apparent agency. The classic case holding a franchisor liable on a theory of apparent agency is Gizzi v. Texaco Inc., 437 F.2d 308 (5th Cir.), cert. denied, 404 U.S. 829 (1971). The plaintiff, Augustine Gizzi, purchased a used Volkswagen van from a Texaco service station. He was injured when the brakes failed shortly thereafter. The franchisee had worked on the brakes before selling the car. The station prominently displayed the Texaco insignia, including the slogan, “Trust your car to the man who wears the star.” The court noted that Texaco engaged in considerable national advertising to convey the impression that its dealers were skilled in automotive servicing. There was a Texaco regional office across the street from the station, and those working in the office knew that the franchisee was selling cars from the station. Based upon this evidence, the court concluded, under New Jersey law, that the question of apparent agency was for the jury. Id. at 310. Must have actual reliance A key element for any claim of apparent agency or agency by estoppel is actual reliance. In Kaplan v. Coldwell Banker Residential Affiliates Inc., 69 Cal. Rptr. 2d 640, 643, the court found a triable issue of fact on the question of agency, although the plaintiff had no personal communications with the franchisor. The court held, however, that the franchisor had made representations to the public in general, upon which the victim had relied. The court reasoned that an agency is apparent when the principal intentionally, or by want of ordinary care, causes a third person to believe another to be his or her agent. Accordingly, the court determined that the name, Coldwell Banker, an advertising campaign, the logo and the use of the word “member” were designed to bring customers into Coldwell Banker franchises. A disclaimer on an advertisement informing the public that the franchisee was independently owned did not dissuade the court from reversing the summary judgment entered by the lower court in favor of the franchisor. Michael D. Joblove is a partner at Miami’s Genovese Joblove & Battista. He focuses his national practice on franchise law. William Killion is a partner at Minneapolis’ Gray, Plant & Mooty. He focuses his national practice on franchise law. Killion was counsel for American Dairy Queen in Neff v. American Dairy Queen Corp., which is mentioned in this article. The problem with both the actual and apparent agency cases is that traditional notions of agency law simply do not apply in the franchise context. A franchisor must necessarily exercise sufficient control over a franchisee to protect the franchisor’s national identity, while at the same time forgoing such a degree of control that would make it vicariously liable for the acts of the franchisee’s employees. Given the necessity of balancing these competing goals, one can argue that the judicial inquiry should not be focused on generalized notions of control. Rather, the appropriate inquiry would be whether the franchisor had any direct responsibility for the instrument causing the injury. As the Texas Supreme Court explained in Tidwell, it is inappropriate to surmise that general controls in the franchise system evidence the franchisor’s ability to control the incident causing the injury. Instead, the focus should be limited to the instrumentality causing the harm. To do otherwise imposes upon the franchisor the risk of systemwide liability, a scenario that would undermine the very purpose of franchising.

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