Making the Case for the Benefits of Uniformity and Predictability

Uniformity and predictability are often lacking from judicial treatment of cases involving vicarious liability claims against franchisors, yet uniformity and predictability are the hallmarks of a successful franchise system, and the engines that have driven franchising to occupy such a prominent position in the domestic and worldwide economy.

Franchise agreement contract terms frequently reflect very legitimate operational and legal concerns of franchisors. With franchisees all over the country and beyond, a forum selection clause and a home-state choice of law clause make eminent good sense, at least to franchisors ' notwithstanding the denomination of out-of-state forum selection and choice-of-law clauses as “risk factors” to some states regulating franchise sales. A franchisor should, the argument goes, have the benefit of uniformity and predictability that comes from having its home state laws applied by its home state courts or arbitrators to all legal issues arising under its agreements with its far-flung franchisees.

Franchisees buy franchises, as opposed to starting their own businesses, because they seek to benefit from the successful practices and procedures of a proven concept. What a franchisor offers, in addition to a recognizable trademark, is a business method for selling the particular product or service that the brand identifies. Without a uniform business method, each Dunkin' Donuts shop operator would sell donuts and coffee (not to mention, hot dogs and panty hose) the way he or she chose, not necessarily with rhyme or reason from day to day, or shift to shift. No customer would know from one Dunkin' Donuts shop to another Dunkin' Donuts shop what the product mix, presentation, or preparation would be, what the level of service would be, what the physical surroundings would be ' in short, the entire consumer experience would likely differ from shop to shop. Customers could not with confidence transfer a positive consumer experience in one shop to the expectation of a similar experience in another shop, either in the next town or the next state; and negative consumer experiences in individual shops would either likely over time poison the whole system, or customers would come to learn that each Dunkin' Donuts shop would have to be tested, tasted, and experienced on its own merits or lack thereof. In short, we would face not necessarily economic chaos, but certainly not a franchise system as our consumer-driven economy has demanded, and has been developed in response to that demand.

Franchisees also benefit from the uniformity and predictability that marks a successful franchise system. As we all know, franchise systems do not spring, fully developed, from the pages of a Uniform Franchise Offering Circular or a franchise agreement. The legal underpinnings of a fledgling franchise system, while technically adequate to permit the offering of franchises for sale, do not sell franchises, support franchisees, or grow a franchise system. Years of research and development, trial and error, and the continual investment by the franchisor of time, talent, and money are necessary for a franchise system to survive and thrive. As a practical matter, those franchise systems that do not make these continuing investments are supplanted by those that do.

Vulnerability to Vicarious Liability Claims

Franchise systems that prosper in the marketplace, attract new franchisees, and provide successful and growing opportunities to existing franchisees, all must have the kinds of controlled methods of operation that foster such prosperity and opportunity. This is the lesson of successful franchising. Paradoxically, one may reasonably argue that the more successful a franchise system is in the business of creating a thriving franchise system, the more susceptible that franchise system is to vicarious liability claims succeeding against it under traditional approaches of control and right to control.

What's wrong with this picture is that it's a picture of traditional approaches to vicarious liability that have their root in master/servant relationships and doctrine, and not a picture of franchising.

There is a name for the doing of business under a trademark without a uniform business method of marketing approach or cohesive and extensive quality control: licensing. Licensing permits a licensee to use a mark registered to another to identify a product or service without strict adherence to controls and methods developed by the licensor. Generally speaking, how and, indeed, whether a licensee sells or presents the licensed product is entirely up to the licensee. The principal difference between franchising and licensing is the requirement of a franchise that a franchisee conduct the franchised business utilizing the marketing support and assistance provided by the franchisor.

A recent case involving a serious vicarious liability claim in which the author was involved as an advocate for the franchisor illustrates the difficulty of analyzing this type of claim against a franchisor on a traditional analysis that focuses exclusively on the right to control. In this case, a plaintiff was seriously injured in an automobile accident that occurred outside of the United States involving a well-known U.S.-based international auto rental franchisor. The foreign franchisee was beyond the court's jurisdiction, and the law of the country where the accident occurred was, on balance, less favorable to the franchisor than the law of the state in which the lawsuit had been brought. As the franchisor had done nothing to contribute to the occurrence of the accident, and in fact, had not even inspected or visited the foreign franchisee for many years, the result was that the defendant franchisor was facing a liability claim based exclusively upon the negligence of its absent franchisee. Of course, as with most franchise systems, the franchise manuals were extensive and detailed, but since they were reviewed by very good lawyers, their contents certainly did not attempt to control what most would agree are the hallmarks of day-to-day control – hiring and firing, staffing, and the manner and method of how the franchisee would accomplish the task of running the franchise.

Expert witnesses on franchising appeared for both franchisor and the plaintiff. The plaintiff's expert took the position that, by definition, operation of a business-format franchise amounted to control over the day-to-day operations of the franchised business, which is sufficient control to make the franchisee the agent of the franchisor. The franchisor's expert, on the other hand, took the position that the franchise relationship, because it was international, involved an almost hands-off relationship between franchisor and franchisee that the expert likened to licensing rather than franchising. The case was settled, so we do not know whose argument would have prevailed. A truer picture of franchising and its benefits may help the courts and juries understand the business relationship of franchisor and franchisee in a way that does not involve contorting control on a case-by-case basis. To spin the contents of a franchise agreement or operations manual does not explain to the court and jury what the franchise relationship really is, and what its societal benefit is.

What each expert may have missed, and what the cases do not often enough address, is a presentation that stresses the benefits to the economy and society of franchising as a way of doing business ' how many jobs it creates, how pervasive it is as a business model, what percentage of the gross national product it represents, how it is a formative work experience for much of America's work force, the promise of independence it offers business owners, and the value to consumers of the uniformity and predictability that its offerings represent, including in many cases, to the plaintiff himself who would not have chosen to do business at the particular outlet except for its implied promise of quality that comes from uniformity. These hallmarks recognize that franchising as a business method would not have prospered but for consumer acceptance of, and demand for, the types of control that courts frequently cite as evidence of agency.

For lawyers and business executive who want to approach vicarious liability in a new way, the author recommends as a starting point the 2004 PriceWaterhouse Coopers Study, titled, “The Economic Impact of Franchised Businesses,” commissioned by the International Franchise Association Education Foundation. The study analyzes in great detail the role of franchising in the economy in a way that makes the reader appreciate how valuable a distribution model franchising really is.

Uniformity and predictability are often lacking from judicial treatment of cases involving vicarious liability claims against franchisors, yet uniformity and predictability are the hallmarks of a successful franchise system, and the engines that have driven franchising to occupy such a prominent position in the domestic and worldwide economy.

Franchise agreement contract terms frequently reflect very legitimate operational and legal concerns of franchisors. With franchisees all over the country and beyond, a forum selection clause and a home-state choice of law clause make eminent good sense, at least to franchisors ' notwithstanding the denomination of out-of-state forum selection and choice-of-law clauses as “risk factors” to some states regulating franchise sales. A franchisor should, the argument goes, have the benefit of uniformity and predictability that comes from having its home state laws applied by its home state courts or arbitrators to all legal issues arising under its agreements with its far-flung franchisees.

Franchisees buy franchises, as opposed to starting their own businesses, because they seek to benefit from the successful practices and procedures of a proven concept. What a franchisor offers, in addition to a recognizable trademark, is a business method for selling the particular product or service that the brand identifies. Without a uniform business method, each Dunkin' Donuts shop operator would sell donuts and coffee (not to mention, hot dogs and panty hose) the way he or she chose, not necessarily with rhyme or reason from day to day, or shift to shift. No customer would know from one Dunkin' Donuts shop to another Dunkin' Donuts shop what the product mix, presentation, or preparation would be, what the level of service would be, what the physical surroundings would be ' in short, the entire consumer experience would likely differ from shop to shop. Customers could not with confidence transfer a positive consumer experience in one shop to the expectation of a similar experience in another shop, either in the next town or the next state; and negative consumer experiences in individual shops would either likely over time poison the whole system, or customers would come to learn that each Dunkin' Donuts shop would have to be tested, tasted, and experienced on its own merits or lack thereof. In short, we would face not necessarily economic chaos, but certainly not a franchise system as our consumer-driven economy has demanded, and has been developed in response to that demand.

Franchisees also benefit from the uniformity and predictability that marks a successful franchise system. As we all know, franchise systems do not spring, fully developed, from the pages of a Uniform Franchise Offering Circular or a franchise agreement. The legal underpinnings of a fledgling franchise system, while technically adequate to permit the offering of franchises for sale, do not sell franchises, support franchisees, or grow a franchise system. Years of research and development, trial and error, and the continual investment by the franchisor of time, talent, and money are necessary for a franchise system to survive and thrive. As a practical matter, those franchise systems that do not make these continuing investments are supplanted by those that do.

Vulnerability to Vicarious Liability Claims

Franchise systems that prosper in the marketplace, attract new franchisees, and provide successful and growing opportunities to existing franchisees, all must have the kinds of controlled methods of operation that foster such prosperity and opportunity. This is the lesson of successful franchising. Paradoxically, one may reasonably argue that the more successful a franchise system is in the business of creating a thriving franchise system, the more susceptible that franchise system is to vicarious liability claims succeeding against it under traditional approaches of control and right to control.

What's wrong with this picture is that it's a picture of traditional approaches to vicarious liability that have their root in master/servant relationships and doctrine, and not a picture of franchising.

There is a name for the doing of business under a trademark without a uniform business method of marketing approach or cohesive and extensive quality control: licensing. Licensing permits a licensee to use a mark registered to another to identify a product or service without strict adherence to controls and methods developed by the licensor. Generally speaking, how and, indeed, whether a licensee sells or presents the licensed product is entirely up to the licensee. The principal difference between franchising and licensing is the requirement of a franchise that a franchisee conduct the franchised business utilizing the marketing support and assistance provided by the franchisor.

A recent case involving a serious vicarious liability claim in which the author was involved as an advocate for the franchisor illustrates the difficulty of analyzing this type of claim against a franchisor on a traditional analysis that focuses exclusively on the right to control. In this case, a plaintiff was seriously injured in an automobile accident that occurred outside of the United States involving a well-known U.S.-based international auto rental franchisor. The foreign franchisee was beyond the court's jurisdiction, and the law of the country where the accident occurred was, on balance, less favorable to the franchisor than the law of the state in which the lawsuit had been brought. As the franchisor had done nothing to contribute to the occurrence of the accident, and in fact, had not even inspected or visited the foreign franchisee for many years, the result was that the defendant franchisor was facing a liability claim based exclusively upon the negligence of its absent franchisee. Of course, as with most franchise systems, the franchise manuals were extensive and detailed, but since they were reviewed by very good lawyers, their contents certainly did not attempt to control what most would agree are the hallmarks of day-to-day control – hiring and firing, staffing, and the manner and method of how the franchisee would accomplish the task of running the franchise.

Expert witnesses on franchising appeared for both franchisor and the plaintiff. The plaintiff's expert took the position that, by definition, operation of a business-format franchise amounted to control over the day-to-day operations of the franchised business, which is sufficient control to make the franchisee the agent of the franchisor. The franchisor's expert, on the other hand, took the position that the franchise relationship, because it was international, involved an almost hands-off relationship between franchisor and franchisee that the expert likened to licensing rather than franchising. The case was settled, so we do not know whose argument would have prevailed. A truer picture of franchising and its benefits may help the courts and juries understand the business relationship of franchisor and franchisee in a way that does not involve contorting control on a case-by-case basis. To spin the contents of a franchise agreement or operations manual does not explain to the court and jury what the franchise relationship really is, and what its societal benefit is.

What each expert may have missed, and what the cases do not often enough address, is a presentation that stresses the benefits to the economy and society of franchising as a way of doing business ' how many jobs it creates, how pervasive it is as a business model, what percentage of the gross national product it represents, how it is a formative work experience for much of America's work force, the promise of independence it offers business owners, and the value to consumers of the uniformity and predictability that its offerings represent, including in many cases, to the plaintiff himself who would not have chosen to do business at the particular outlet except for its implied promise of quality that comes from uniformity. These hallmarks recognize that franchising as a business method would not have prospered but for consumer acceptance of, and demand for, the types of control that courts frequently cite as evidence of agency.

For lawyers and business executive who want to approach vicarious liability in a new way, the author recommends as a starting point the 2004 PriceWaterhouse Coopers Study, titled, “The Economic Impact of Franchised Businesses,” commissioned by the International Franchise Association Education Foundation. The study analyzes in great detail the role of franchising in the economy in a way that makes the reader appreciate how valuable a distribution model franchising really is.