Court Watch

Franchisor Not Liable for Franchisee's Alleged Negligent Supervision and Hiring

The Wisconsin Court of Appeals has affirmed a trial court's decision granting summary judgment to a franchisor and dismissing vicarious liability claims against it on the grounds that the franchisor did not, as a matter of law, have the right of control or actual control over the alleged negligent activity. Keri, et. al. v. Rasmussen, et. al., 2003 WL 22304593 (Wis. App. 2003).

The case involved a county jail inmate with work-release privileges who was an employee of Dennis Rasmussen, Inc. (“DRI”), an Arby's franchisee. On June 11, 1999, the employee left his shift at the Arby's restaurant, walked approximately 1/2 mile to a Wal-Mart store parking lot, and shot his former girlfriend and her fiance. And then he shot himself. The employee and the former girlfriend died, while the fiance was permanently disabled.

The plaintiffs sued DRI for negligent hiring and negligent supervision, and they also brought claims against Arby's, Inc., alleging that it was vicariously liable for DRI's negligent supervision and negligent hiring. The plaintiffs claimed that DRI was negligent with respect to restaurant management, personnel policies and practices, and in noncompliance with work-release rules and regulations. According to the plaintiffs, Arby's exerted sufficient control over its franchisee to render it vicariously liable for DRI's negligence. Arby's moved for summary judgment arguing that, as a matter of law, it did not have the right to control the franchisee's personnel decisions and practices. The trial court agreed with Arby's, and it dismissed all claims against the franchisor.

On appeal, the court thoroughly examined the state of the law of vicarious liability in the context of the franchise relationship. While the plaintiffs urged the court to apply the standard adopted by the Eastern District of Wisconsin in Raasch v. Dulany, 273 F. Supp. 1015 (E.D. Wisc. 1967), holding that if the franchisor had the “right to control the daily operations of a franchisee,” it may be liable for injuries caused by the franchisee's negligence, the court relied on more recent franchise cases and applied a different standard. According to the court, the prevailing standard and proper inquiry is not whether the franchisor generally has the right to control the franchisee's daily operations, but rather whether the franchisor has a right of control or actual control over the alleged negligent activity that caused the injury.

Applying that standard, the court considered whether the facts of the case warranted imposing vicarious liability on Arby's for the alleged negligence of its franchisee. The court observed that because the claim was primarily one for failure to supervise, the inquiry was whether Arby's had a right to control DRI's personnel practices. The court then reviewed the license agreement and concluded that DRI, not Arby's, was responsible for hiring, training, maintaining, and properly supervising its employees. While Arby's generally had the right, under the license agreement, to inspect the premises and otherwise enforce the provisions of the license agreement, the agreement did not give Arby's the right to hire, fire, or direct the supervision of DRI's employees. Thus, according to the court, as a matter of law, Arby's could not be vicariously liable for DRI's alleged negligent employee supervision and hiring practices.

Evidentiary Sanctions Upheld Against Franchisor for Unethical Conduct

The U.S. Court of Appeals for the 8th Circuit has affirmed a trial court's decision preventing a franchisor from introducing tape recordings of a franchisee's employees which contained critical admissions on the grounds that its attorney's conduct of secretly recording conversations with the employees, although not illegal, was unethical. Midwest Motor Sports, et. al. v. Arctic Cat Sales, Inc., et. al., __ F.3d __, 2003 WL 22367608 (8th Cir. 2003).

Arctic Cat Sales, Inc., (“Arctic”), a snowmobile franchisor, was sued by two of its South Dakota dealers (the “Dealers”) for alleged violations of South Dakota franchise law when it terminated the Dealers' franchises. During discovery, Arctic's attorney hired a private investigator to secretly interview and record conversations with the Dealers' employees for use at trial. Arctic's attorney requested that the investigator visit the Dealers' showrooms and record conversations with the Dealers' employees aimed at determining which brand of snowmobile had been selling best, in order to find out whether the Dealers had been financially burdened by the termination of the Arctic franchise.

While the trial court held that South Dakota law, the law applicable to the dispute, clearly permitted the recording of a conversation by one party to the conversation without the consent of the other party, the trial court was troubled by Arctic's counsel's aggressive discovery tactics and it decided to exclude from evidence not only the tape recording but also any evidence that was uncovered as a result of the tape recordings. Arctic appealed.

The trial court's decision was affirmed on appeal. Interestingly, the appellate court noted that between the time of the district court's opinion and the appeal, there was an ABA Formal Opinion (No. 337) which stated that an attorney who electronically records a conversation without the knowledge of the other party or parties to the conversation does not necessarily violate the Model Rules of Professional Conduct, which are adopted in most states. However, the court observed that while an attorney does not necessarily violate the Model Rules of Professional Conduct by recording conversations, the recorded conversations would be prohibited if they were conducted under circumstances that render them unethical. ABA Model Opinion No, 01-422.

According to the appellate court, the circumstances of the tape recordings in this case were such that they were unethical. The court observed that the employees were “represented by counsel” at the time of the interviews, and the interviews were conducted in a fraudulent and deceitful manner. As a result, the court concluded that Arctic's counsel's conduct was unethical, and it held that the trial court did not err when it excluded all of the evidence obtained as a result of the unethical conduct.

Franchise Agreement's Forum Selection Provision Enforced

The Missouri Court of Appeals has affirmed a trial court's order granting a franchisor's president's motion to dismiss a complaint alleging franchise fraud on the grounds that the franchise agreement contained a forum selection clause that required litigation to be brought in Dade County, FL, the franchisor's principal place of business. Burke v. Goodman, 114 S.W.3d 276 (Mo. Ct. App. 2003).

A franchisee of prepaid phone card vending machines brought an action against Goodman, the president and sole shareholder of its franchisor, Americard Dispensing Corporation (“ADC”), in Missouri state court, alleging that Goodman fraudulently induced him to enter into a franchise agreement. Goodman moved to dismiss the complaint because the franchise agreement contained a forum selection provision requiring that all claims be brought in Dade County, FL. The franchisee claimed that the forum selection provision was inapplicable because Goodman was not a party to the franchise agreement, or, even if it were applicable, it was invalid.

The trial court held that the forum selection was applicable even though Goodman was not a signatory to the franchise agreement because the complaint alleged that Goodman was the agent and alter ego of the franchisor and, as a result, Goodman was entitled to rely on the franchise agreement's forum selection provision. The trial court also found that the forum selection clause was not invalid because it was not unreasonable or unfair. As a result, the trial court dismissed the complaint. The franchisee appealed.

The appellate court affirmed. It held that the forum selection provision was applicable to claims against Goodman, individually, for the reasons stated by the trial court. It also found that that the forum selection provision was neither unfair nor unreasonable. The court observed that to be fair, a contract must be entered into voluntarily, and it must not be a contract of adhesion. It found that the agreement at issue was fair because it was entered freely by the franchisee and it was an arm's length agreement. The court also found that the agreement was reasonable because it called for litigation in the defendant's home state, and the franchisee failed to prove that litigation in Florida would be so gravely difficult that he would be deprived of his day in court.

Franchisor Not Liable for Franchisee's Alleged Negligent Supervision and Hiring

The Wisconsin Court of Appeals has affirmed a trial court's decision granting summary judgment to a franchisor and dismissing vicarious liability claims against it on the grounds that the franchisor did not, as a matter of law, have the right of control or actual control over the alleged negligent activity. Keri, et. al. v. Rasmussen, et. al., 2003 WL 22304593 (Wis. App. 2003).

The case involved a county jail inmate with work-release privileges who was an employee of Dennis Rasmussen, Inc. (“DRI”), an Arby's franchisee. On June 11, 1999, the employee left his shift at the Arby's restaurant, walked approximately 1/2 mile to a Wal-Mart store parking lot, and shot his former girlfriend and her fiance. And then he shot himself. The employee and the former girlfriend died, while the fiance was permanently disabled.

The plaintiffs sued DRI for negligent hiring and negligent supervision, and they also brought claims against Arby's, Inc., alleging that it was vicariously liable for DRI's negligent supervision and negligent hiring. The plaintiffs claimed that DRI was negligent with respect to restaurant management, personnel policies and practices, and in noncompliance with work-release rules and regulations. According to the plaintiffs, Arby's exerted sufficient control over its franchisee to render it vicariously liable for DRI's negligence. Arby's moved for summary judgment arguing that, as a matter of law, it did not have the right to control the franchisee's personnel decisions and practices. The trial court agreed with Arby's, and it dismissed all claims against the franchisor.

On appeal, the court thoroughly examined the state of the law of vicarious liability in the context of the franchise relationship. While the plaintiffs urged the court to apply the standard adopted by the Eastern District of Wisconsin in Raasch v. Dulany , 273 F. Supp. 1015 (E.D. Wisc. 1967), holding that if the franchisor had the “right to control the daily operations of a franchisee,” it may be liable for injuries caused by the franchisee's negligence, the court relied on more recent franchise cases and applied a different standard. According to the court, the prevailing standard and proper inquiry is not whether the franchisor generally has the right to control the franchisee's daily operations, but rather whether the franchisor has a right of control or actual control over the alleged negligent activity that caused the injury.

Applying that standard, the court considered whether the facts of the case warranted imposing vicarious liability on Arby's for the alleged negligence of its franchisee. The court observed that because the claim was primarily one for failure to supervise, the inquiry was whether Arby's had a right to control DRI's personnel practices. The court then reviewed the license agreement and concluded that DRI, not Arby's, was responsible for hiring, training, maintaining, and properly supervising its employees. While Arby's generally had the right, under the license agreement, to inspect the premises and otherwise enforce the provisions of the license agreement, the agreement did not give Arby's the right to hire, fire, or direct the supervision of DRI's employees. Thus, according to the court, as a matter of law, Arby's could not be vicariously liable for DRI's alleged negligent employee supervision and hiring practices.

Evidentiary Sanctions Upheld Against Franchisor for Unethical Conduct

The U.S. Court of Appeals for the 8th Circuit has affirmed a trial court's decision preventing a franchisor from introducing tape recordings of a franchisee's employees which contained critical admissions on the grounds that its attorney's conduct of secretly recording conversations with the employees, although not illegal, was unethical. Midwest Motor Sports, et. al. v. Arctic Cat Sales, Inc., et. al., __ F.3d __, 2003 WL 22367608 (8th Cir. 2003).

Arctic Cat Sales, Inc., (“Arctic”), a snowmobile franchisor, was sued by two of its South Dakota dealers (the “Dealers”) for alleged violations of South Dakota franchise law when it terminated the Dealers' franchises. During discovery, Arctic's attorney hired a private investigator to secretly interview and record conversations with the Dealers' employees for use at trial. Arctic's attorney requested that the investigator visit the Dealers' showrooms and record conversations with the Dealers' employees aimed at determining which brand of snowmobile had been selling best, in order to find out whether the Dealers had been financially burdened by the termination of the Arctic franchise.

While the trial court held that South Dakota law, the law applicable to the dispute, clearly permitted the recording of a conversation by one party to the conversation without the consent of the other party, the trial court was troubled by Arctic's counsel's aggressive discovery tactics and it decided to exclude from evidence not only the tape recording but also any evidence that was uncovered as a result of the tape recordings. Arctic appealed.

The trial court's decision was affirmed on appeal. Interestingly, the appellate court noted that between the time of the district court's opinion and the appeal, there was an ABA Formal Opinion (No. 337) which stated that an attorney who electronically records a conversation without the knowledge of the other party or parties to the conversation does not necessarily violate the Model Rules of Professional Conduct, which are adopted in most states. However, the court observed that while an attorney does not necessarily violate the Model Rules of Professional Conduct by recording conversations, the recorded conversations would be prohibited if they were conducted under circumstances that render them unethical. ABA Model Opinion No, 01-422.

According to the appellate court, the circumstances of the tape recordings in this case were such that they were unethical. The court observed that the employees were “represented by counsel” at the time of the interviews, and the interviews were conducted in a fraudulent and deceitful manner. As a result, the court concluded that Arctic's counsel's conduct was unethical, and it held that the trial court did not err when it excluded all of the evidence obtained as a result of the unethical conduct.

Franchise Agreement's Forum Selection Provision Enforced

The Missouri Court of Appeals has affirmed a trial court's order granting a franchisor's president's motion to dismiss a complaint alleging franchise fraud on the grounds that the franchise agreement contained a forum selection clause that required litigation to be brought in Dade County, FL, the franchisor's principal place of business. Burke v. Goodman, 114 S.W.3d 276 (Mo. Ct. App. 2003).

A franchisee of prepaid phone card vending machines brought an action against Goodman, the president and sole shareholder of its franchisor, Americard Dispensing Corporation (“ADC”), in Missouri state court, alleging that Goodman fraudulently induced him to enter into a franchise agreement. Goodman moved to dismiss the complaint because the franchise agreement contained a forum selection provision requiring that all claims be brought in Dade County, FL. The franchisee claimed that the forum selection provision was inapplicable because Goodman was not a party to the franchise agreement, or, even if it were applicable, it was invalid.

The trial court held that the forum selection was applicable even though Goodman was not a signatory to the franchise agreement because the complaint alleged that Goodman was the agent and alter ego of the franchisor and, as a result, Goodman was entitled to rely on the franchise agreement's forum selection provision. The trial court also found that the forum selection clause was not invalid because it was not unreasonable or unfair. As a result, the trial court dismissed the complaint. The franchisee appealed.

The appellate court affirmed. It held that the forum selection provision was applicable to claims against Goodman, individually, for the reasons stated by the trial court. It also found that that the forum selection provision was neither unfair nor unreasonable. The court observed that to be fair, a contract must be entered into voluntarily, and it must not be a contract of adhesion. It found that the agreement at issue was fair because it was entered freely by the franchisee and it was an arm's length agreement. The court also found that the agreement was reasonable because it called for litigation in the defendant's home state, and the franchisee failed to prove that litigation in Florida would be so gravely difficult that he would be deprived of his day in court.