Developments in Vicarious Liability

Franchisors generally have deeper pockets than their franchisees, making them an obvious target for vicarious liability lawsuits when a customer or client of a franchise is harmed or believes he has been harmed. These claims are regularly advanced by plaintiffs, even though “part of the very nature of setting up a franchise system is to limit [the franchisor's] liability and to push liability down to franchisees, who really have control over their own business operations,” said Nixon Peabody partner Gregg Rubenstein during a Webinar in December about vicarious liability trends in franchising.

Courts have occasionally concluded that a franchisor might be liable for the actions of its franchisee or for harm suffered on the premises of a franchisee. Rarely do these issues arise in the most common form of vicarious liability claim, those related to the actions of an employee, because franchisors have been very successful at writing contracts that make it clear that franchisees are employing their workers, not franchisors.

Principal-Agent Relationships

However, when the vicarious liability claim is related to a principal-agent relationship, vicarious liability claims have proceeded further. “The problem for franchisors has traditionally been that when courts analyze vicarious liability claims, they talk about the 'right to control.' Well, franchisors have both a right and an obligation to control how their franchisees perform certain actions, and, most importantly, how franchisees use the trademark,” said Rubenstein. “The Lanham Act requires trademark owners to take appropriate and reasonable steps to police the use of a trademark. This unfortunate coincidence of language ' 'right to control' a trademark and 'right to control' an agent ' has created a lot of uncertainty in the law over analyzing vicarious liability claims.”

The Right-to-Control Standard

Fortunately for franchisors, courts in the last two years have become more consistent and careful about applying the right-to-control standard. “What courts have generally adopted now, in the franchise context, and courts have been accepting when presented with a vicarious liability claim in the franchise context, is that they have to be more specific in their analysis,” said Rubenstein. “They have to ask, 'Did the franchisor have the right to control the specific thing that allegedly caused the harm?' The right to control generally is not enough.”

Viado v. Domino's Pizza (217 P.3d 199 (Or. Ct. App. 2009)) demonstrates clarity of thinking about a franchisor's vicarious liability, Rubenstein said. In this case, a trial court and the appeals court ruled that the franchisor, Domino's, did not have vicarious liability for an accident caused by a Domino's delivery driver. The complaint by Mr. and Mrs. Viado for bodily harm against the franchisor was dismissed on summary judgment. “This [opinion] is a real tour de force,” said Rubenstein. “Not only does the court get the right answer, it does it in a fabulous opinion that walks through each of the issues.”

The appeals court affirmed the trial court's dismissal of the complaint against Domino's. The court first looked at the agency-principal relationship, which is established when two factors are met: the agent has to be subject to the principal's control, and the agent has to act on behalf of the principal. “While the court recognized that Domino's did not have complete control over how [the franchisee] performed its business, it looked at the franchise agreement, it looked to the operations manual, it looked to all the standards that Domino's set, and it looked to cases from across the country, and it said that the right to control is sufficient to show some type of agent-principal relationship,” said Rubenstein.

Next, the court determined that it was a non-employee principal-agent relationship, rather than an employee relationship. In this context, Domino's would be vicariously liable only if it had the right to control the specific activity that caused the harm. Domino's did have some control, as it set standards for the driver's minimum age, driving record, and more. But the court decided that it was the day-to-day driving that caused the harm, and Domino's did not have the right to control it because it did not make decisions such as which route the driver took. “It was, in this case, something of a close call,” said Rubenstein.

Franchisors also should be pleased that the court noted the explicit language in the Domino's franchise agreement that stated that Domino's did not have a principal-agent employee relationship with its franchisee or its employees. However, Rubenstein observed that franchisees are increasingly trying to assert an employment-based principal-agent relationship with their franchisors, and if courts recognize those relationships, a vicarious liability claim will be very easy to establish.

Other Cases

Thompson v. McDonald's Corp.

In other cases where the franchisor has exerted more control or where it has made claims of control, courts have not dismissed vicarious liability claims. In Thompson v. McDonald's Corp. (2009 Cal. App. Unpub. LEXIS 4693 (Cal. App. 2d Dist. June 15, 2009)), the court looked at whether McDonald's was liable for injuries suffered by a 16-year-old employee who was shot while she was working at its drive-through window at a Los Angeles restaurant. “In this case, when a franchisor has specified how a building has to be built, is it going to be held liable for negligence in the design or maintenance or features of the structure?” asked Diane Vilmenay, an associate with Nixon Peabody. “The answer is, 'maybe.'”

The employee sued for negligence, arguing that McDonald's failed to exercise ordinary care in managing and maintaining the premises in a high-crime area. The restaurant had been remodeled in 2001 to strict McDonald's design specifications by architects and contractors approved by the company. The drive-through window was supposed to automatically shut and lock when an employee pulled his or her hand inside. The injured employee stated that the window would lock only if she turned a knob, and since it did not automatically lock, a man was able to reach inside, grab her arm, try to pull her through the window, and shoot her.

McDonald's argued that it did not own, operate, or control the restaurant, and that it did not owe a duty of care because the shooting was not a foreseeable event. McDonald's won summary judgment at a lower court, but the appeals court reversed it on two of three issues. While ruling against the plaintiff on the issue of causation, the court ruled that there were triable issues of fact regarding the franchisor's control of the restaurant and the foreseeability of the crime. “McDonald's set the standard on how the restaurant was built and the type of window that was used. Because the franchisor set the standard about how the restaurant was built, it may be concluded that it was the instrumentality over what caused the harm,” said Vilmenay. “The lesson is, if you set the standard, you must police it.”

Pinero v. Jackson Hewitt Tax Service, Inc.

In another case, Pinero v. Jackson Hewitt Tax Service, Inc. (2009 U.S. Dist. LEXIS 91290 (E.D. La. Sept. 16, 2009)), the court found that the plaintiff had sufficiently alleged that the franchisor exercised control over an aspect of the franchisee's operation that failed. In this case, Vicki L. Pinero went to a Jackson Hewitt franchise for a 2005 tax return. She was given a privacy agreement form created by Jackson Hewitt, and she signed it. In 2008, her returns and those of other clients of the franchise were found in a dumpster, unshredded and readable. The franchisee claimed that the documents were stolen, rather than dumped in violation of its privacy promises. Pinero sued for fraud, breach of Louisiana's unfair trade practices law, and privacy violations.

The district court issued a mixed ruling. It dismissed the privacy violation claim against Jackson Hewitt (not against the franchisee) because Jackson Hewitt's relationship did not meet the state's definition for a principal-agent relationship. “The principal is only liable for the tort of an agent where it has the right to control the physical details of the agent or to control its manner of performance,” said Vilmenay. “The court found that the franchise agreement made [franchisee] Crescent City specifically responsible for personnel decisions. In this case, the franchise agreement helped to cut the case in two ways.”

However, the court did not dismiss the fraud and unfair trade practices claims. The plaintiff said that Jackson Hewitt's stated privacy policy induced her to get her returns done by the franchise, and that the policy specifically stated that it was provided by Jackson Hewitt, its subsidiaries and assigns, and its independently owned franchisee. “The franchisor had control over many aspects of the business, including furniture and equipment, customer-service procedures, performance standards, and records maintenance. Because Jackson Hewitt had control over general operating procedures, the [court said that] failure to maintain proper privacy controls could be attributed to both the franchisor and franchisee,” Vilmenay said.

From a franchisor's perspective, Vilmenay called the ruling “dangerous” because the court “looked directly to the privacy policy and then to the franchise agreement to determine whether Jackson Hewitt had a right to control and, in fact, did control the instrumentality, so to speak.”

Advice for Franchisors

Rubenstein and Vilmenay said that the lesson for franchisors is to think “long and hard” about what they need to control in order to protect their brand.

“There is oftentimes a knee-jerk reaction by many franchisors to control as much as possible. And the problem with that is that the more the franchisor controls, the more responsibility I believe it will have ' for policing that which it has chosen to control,” said Rubenstein.

“There is a fundamental business decision to be made that if how one particular thing is done is very important to the brand and the brand's success, then the franchisor needs to take responsibility for both setting the appropriate standard and making sure it is being followed. If something is not critical to the brand's success, then leave it alone. Let the franchisees figure out how best to accomplish the end result that you and they require, and try not to set a standard for it,” he said.

One solution is for franchisors to suggest “best practices” to franchisees, rather than requiring specific procedures. “Making a suggestion about a best practice is not the same thing as saying a franchisee must perform a best practice. That is the thin line that a franchisor always has to think about,” said Rubenstein. “The franchisee both expects and deserves the benefit of the wisdom the franchisor has accumulated over the years ' . But sharing wisdom with your franchisees does not mean that they have to agree with it.”

If a franchisor can accept that a franchisee that rejects best practices advice is not violating the franchise agreement, then the franchisor is truly not exercising a right to control, and a vicarious liability claim would be difficult to make. “Then, you get the best of both worlds ' you give advice to franchisees, and hopefully, they appreciate the advice ' and you maintain for yourself as franchisor some protection from these claims,” said Rubenstein.

Kevin Adler is Associate Editor of this newsletter.

Franchisors generally have deeper pockets than their franchisees, making them an obvious target for vicarious liability lawsuits when a customer or client of a franchise is harmed or believes he has been harmed. These claims are regularly advanced by plaintiffs, even though “part of the very nature of setting up a franchise system is to limit [the franchisor's] liability and to push liability down to franchisees, who really have control over their own business operations,” said Nixon Peabody partner Gregg Rubenstein during a Webinar in December about vicarious liability trends in franchising.

Courts have occasionally concluded that a franchisor might be liable for the actions of its franchisee or for harm suffered on the premises of a franchisee. Rarely do these issues arise in the most common form of vicarious liability claim, those related to the actions of an employee, because franchisors have been very successful at writing contracts that make it clear that franchisees are employing their workers, not franchisors.

Principal-Agent Relationships

However, when the vicarious liability claim is related to a principal-agent relationship, vicarious liability claims have proceeded further. “The problem for franchisors has traditionally been that when courts analyze vicarious liability claims, they talk about the 'right to control.' Well, franchisors have both a right and an obligation to control how their franchisees perform certain actions, and, most importantly, how franchisees use the trademark,” said Rubenstein. “The Lanham Act requires trademark owners to take appropriate and reasonable steps to police the use of a trademark. This unfortunate coincidence of language ' 'right to control' a trademark and 'right to control' an agent ' has created a lot of uncertainty in the law over analyzing vicarious liability claims.”

The Right-to-Control Standard

Fortunately for franchisors, courts in the last two years have become more consistent and careful about applying the right-to-control standard. “What courts have generally adopted now, in the franchise context, and courts have been accepting when presented with a vicarious liability claim in the franchise context, is that they have to be more specific in their analysis,” said Rubenstein. “They have to ask, 'Did the franchisor have the right to control the specific thing that allegedly caused the harm?' The right to control generally is not enough.”

Viado v. Domino's Pizza (217 P.3d 199 (Or. Ct. App. 2009)) demonstrates clarity of thinking about a franchisor's vicarious liability, Rubenstein said. In this case, a trial court and the appeals court ruled that the franchisor, Domino's, did not have vicarious liability for an accident caused by a Domino's delivery driver. The complaint by Mr. and Mrs. Viado for bodily harm against the franchisor was dismissed on summary judgment. “This [opinion] is a real tour de force,” said Rubenstein. “Not only does the court get the right answer, it does it in a fabulous opinion that walks through each of the issues.”

The appeals court affirmed the trial court's dismissal of the complaint against Domino's. The court first looked at the agency-principal relationship, which is established when two factors are met: the agent has to be subject to the principal's control, and the agent has to act on behalf of the principal. “While the court recognized that Domino's did not have complete control over how [the franchisee] performed its business, it looked at the franchise agreement, it looked to the operations manual, it looked to all the standards that Domino's set, and it looked to cases from across the country, and it said that the right to control is sufficient to show some type of agent-principal relationship,” said Rubenstein.

Next, the court determined that it was a non-employee principal-agent relationship, rather than an employee relationship. In this context, Domino's would be vicariously liable only if it had the right to control the specific activity that caused the harm. Domino's did have some control, as it set standards for the driver's minimum age, driving record, and more. But the court decided that it was the day-to-day driving that caused the harm, and Domino's did not have the right to control it because it did not make decisions such as which route the driver took. “It was, in this case, something of a close call,” said Rubenstein.

Franchisors also should be pleased that the court noted the explicit language in the Domino's franchise agreement that stated that Domino's did not have a principal-agent employee relationship with its franchisee or its employees. However, Rubenstein observed that franchisees are increasingly trying to assert an employment-based principal-agent relationship with their franchisors, and if courts recognize those relationships, a vicarious liability claim will be very easy to establish.

Other Cases

Thompson v. McDonald's Corp.

In other cases where the franchisor has exerted more control or where it has made claims of control, courts have not dismissed vicarious liability claims. In Thompson v. McDonald's Corp. (2009 Cal. App. Unpub. LEXIS 4693 (Cal. App. 2d Dist. June 15, 2009)), the court looked at whether McDonald's was liable for injuries suffered by a 16-year-old employee who was shot while she was working at its drive-through window at a Los Angeles restaurant. “In this case, when a franchisor has specified how a building has to be built, is it going to be held liable for negligence in the design or maintenance or features of the structure?” asked Diane Vilmenay, an associate with Nixon Peabody. “The answer is, 'maybe.'”

The employee sued for negligence, arguing that McDonald's failed to exercise ordinary care in managing and maintaining the premises in a high-crime area. The restaurant had been remodeled in 2001 to strict McDonald's design specifications by architects and contractors approved by the company. The drive-through window was supposed to automatically shut and lock when an employee pulled his or her hand inside. The injured employee stated that the window would lock only if she turned a knob, and since it did not automatically lock, a man was able to reach inside, grab her arm, try to pull her through the window, and shoot her.

McDonald's argued that it did not own, operate, or control the restaurant, and that it did not owe a duty of care because the shooting was not a foreseeable event. McDonald's won summary judgment at a lower court, but the appeals court reversed it on two of three issues. While ruling against the plaintiff on the issue of causation, the court ruled that there were triable issues of fact regarding the franchisor's control of the restaurant and the foreseeability of the crime. “McDonald's set the standard on how the restaurant was built and the type of window that was used. Because the franchisor set the standard about how the restaurant was built, it may be concluded that it was the instrumentality over what caused the harm,” said Vilmenay. “The lesson is, if you set the standard, you must police it.”

Pinero v. Jackson Hewitt Tax Service, Inc.

In another case, Pinero v. Jackson Hewitt Tax Service, Inc. (2009 U.S. Dist. LEXIS 91290 (E.D. La. Sept. 16, 2009)), the court found that the plaintiff had sufficiently alleged that the franchisor exercised control over an aspect of the franchisee's operation that failed. In this case, Vicki L. Pinero went to a Jackson Hewitt franchise for a 2005 tax return. She was given a privacy agreement form created by Jackson Hewitt, and she signed it. In 2008, her returns and those of other clients of the franchise were found in a dumpster, unshredded and readable. The franchisee claimed that the documents were stolen, rather than dumped in violation of its privacy promises. Pinero sued for fraud, breach of Louisiana's unfair trade practices law, and privacy violations.

The district court issued a mixed ruling. It dismissed the privacy violation claim against Jackson Hewitt (not against the franchisee) because Jackson Hewitt's relationship did not meet the state's definition for a principal-agent relationship. “The principal is only liable for the tort of an agent where it has the right to control the physical details of the agent or to control its manner of performance,” said Vilmenay. “The court found that the franchise agreement made [franchisee] Crescent City specifically responsible for personnel decisions. In this case, the franchise agreement helped to cut the case in two ways.”

However, the court did not dismiss the fraud and unfair trade practices claims. The plaintiff said that Jackson Hewitt's stated privacy policy induced her to get her returns done by the franchise, and that the policy specifically stated that it was provided by Jackson Hewitt, its subsidiaries and assigns, and its independently owned franchisee. “The franchisor had control over many aspects of the business, including furniture and equipment, customer-service procedures, performance standards, and records maintenance. Because Jackson Hewitt had control over general operating procedures, the [court said that] failure to maintain proper privacy controls could be attributed to both the franchisor and franchisee,” Vilmenay said.

From a franchisor's perspective, Vilmenay called the ruling “dangerous” because the court “looked directly to the privacy policy and then to the franchise agreement to determine whether Jackson Hewitt had a right to control and, in fact, did control the instrumentality, so to speak.”

Advice for Franchisors

Rubenstein and Vilmenay said that the lesson for franchisors is to think “long and hard” about what they need to control in order to protect their brand.

“There is oftentimes a knee-jerk reaction by many franchisors to control as much as possible. And the problem with that is that the more the franchisor controls, the more responsibility I believe it will have ' for policing that which it has chosen to control,” said Rubenstein.

“There is a fundamental business decision to be made that if how one particular thing is done is very important to the brand and the brand's success, then the franchisor needs to take responsibility for both setting the appropriate standard and making sure it is being followed. If something is not critical to the brand's success, then leave it alone. Let the franchisees figure out how best to accomplish the end result that you and they require, and try not to set a standard for it,” he said.

One solution is for franchisors to suggest “best practices” to franchisees, rather than requiring specific procedures. “Making a suggestion about a best practice is not the same thing as saying a franchisee must perform a best practice. That is the thin line that a franchisor always has to think about,” said Rubenstein. “The franchisee both expects and deserves the benefit of the wisdom the franchisor has accumulated over the years ' . But sharing wisdom with your franchisees does not mean that they have to agree with it.”

If a franchisor can accept that a franchisee that rejects best practices advice is not violating the franchise agreement, then the franchisor is truly not exercising a right to control, and a vicarious liability claim would be difficult to make. “Then, you get the best of both worlds ' you give advice to franchisees, and hopefully, they appreciate the advice ' and you maintain for yourself as franchisor some protection from these claims,” said Rubenstein.

Kevin Adler is Associate Editor of this newsletter.