Court Watch

The Instrumentality Test For Determining Franchisor Vicarious Liability

Franchisor vicarious liability for alleged franchisee wrongdoing has been widely litigated for many years. However, two recent cases provide a fresh look at this issue and help to clarify the rationale and application of the “instrumentality test” commonly used to determine franchisor vicarious liability.

In Depianti v. Jan-Pro Franchising, Intl, Inc., Bus. Franchise Guide (CCH) ' 15,069 (Mass. Sup. Jud. Ct. June 17, 2013), the Massachusetts Supreme Judicial Court held that a franchisor may be vicariously liable for the conduct of a franchisee only when the franchisor controls or has the right to control the specific policy or practice which has caused the harm to the complaining plaintiff. More specifically, the court adopted the instrumentality test as the applicable standard to determine franchisor various liability in Massachusetts.

The plaintiff in Depianti was a janitorial cleaning services “unit franchisee” who, along with a number of other franchisees, filed a putative class action in the United States District Court for the District of Massachusetts against the defendant/franchisor Jan-Pro Franchising International, Inc. alleging, among other claims, unfair and deceptive business practices and misrepresentation, based upon the alleged conduct of a “regional master franchisee.” The franchisor, Jan-Pro, operated its franchise system by selling regional rights to use the Jan-Pro brand to “regional master franchisees.” Upon purchasing these rights, the regional master franchisees became the exclusive, de facto franchisors of the Jan-Pro brand within defined geographic areas. The regional master franchisees, in turn, sold the right to use the Jan-Pro brand to “unit franchisees,” such as the plaintiff. The plaintiff contended that Jan-Pro should be held vicariously liable for the alleged misconduct of the regional master franchisee.

The U.S. District Court sought clarification from the Massachusetts Supreme Judicial Court on a number of critical state law issues, including the applicable test for determining vicarious liability of franchisors. Specifically, the U.S. District Court certified the question of “[w]hether and how to apply the “right to control test” for vicarious liability to the franchisor-franchisee relationship.

In answering this question in the affirmative, the Massachusetts Supreme Judicial Court first enunciated the general rule for vicarious liability in Massachusetts that “[g]enerally vicarious liability may be imposed where the relation of master and servant existed at the time the plaintiff was injured, whereby the ' act of the servant was legally imputable to the master.” The court held further that “[t]he test to establish the existence of such a relationship is whether the alleged master had “power of control or direction over the alleged servant.” The court noted that “[i]t is not necessary that there be any actual control by the alleged master to make one his servant or agent, but merely a right of the master to control.”

In considering whether to extend this right to control test to the franchise context, the court observed that “[t]his test is not easily transferrable to the franchise relationship,” given the imperative of franchisors to exercise control over franchisees to protect their trademarks. The court noted that “[u]nder Federal law, a franchisor is required to maintain control and supervision over a franchisee's use of its mark or else the franchisor will be deemed to have abandoned its mark under the abandonment provisions of the Lanham Act.” The court thus found that the exercise of control for the protection of trademarks should not result in franchisors being deemed to have created a principal-agent relationship, since “the controls that franchisors are required to maintain under the Lanham Act are not intended 'to create a [F]ederal law of agency ' [or to] saddle the licensor with the responsibilities under [S]tate law of a principal for his agent.'” The court further found that “[b]roadly extending the general 'right to control test' for vicarious liability to the franchisor-franchisee relationship, where franchisors are obligated to maintain certain controls could have the undesirable effect of penalizing franchisors for complying with Federal law.” Consequently, the court concluded that “the 'right to control test' should be applied to the franchisor-franchisee relationship in such a way as to ensure that liability will be imposed only where the conduct at issue properly may be imputed to the franchisor.”

The Massachusetts court consequently looked to the decision of the Wisconsin Supreme Court in Kerl v. Dennis Rasmussen, Inc., 273 Wis. 2d 106,125 (2004), to adopt a modified version of the right to control test, known as the “instrumentality test.” The instrumentality test, as set forth in Kerl , provides that a franchisor may be held vicariously liable for the conduct of its franchisee only if the franchisor controls or has a right to control the daily conduct or operation of the particular “instrumentality” or aspect of the franchisee's business that is alleged to have caused the harm. The court in Depianti found that the instrumentality test of Kerl was in accord with the approach of the majority of the courts that have considered vic-arious liability in the context of the franchisor-franchsee relationship. In such cases, “the franchisor typically is found to be vicariously liable only in situations where it exercised considerable control over the franchisee and the specific instrumentality at issue in a given case .” (Emphasis added). Consequently, the court decided to “join these courts in concluding that a franchisor is vicariously liable for the conduct of its franchisee only where the franchisor controls or has the right to control the specific policy or practice resulting in harm to the plaintiff.”

Courtland v. GCEP-Surprise, LLC

In Depianti , the Massachusetts Supreme Judicial Court adopted the instrumentality test as the Massachusetts standard for determining franchisor vicarious liability, but it did not apply the test since it was only addressing the issue in the context of a certified question from the United States District Court. Courtland v. GCEP-Surprise, LLC, Bus. Franchise Guide (CCH) ' 15,101 (D.C. AZ July 29, 2013), however, does provide a recent example of the actual application of the instrumentality test in the context of an employment discrimination case. In Courtland, the United States District Court for Arizona held that a franchised restaurant employee could not hold a restaurant franchisor vicariously liable for the discriminatory conduct of the franchisee's employee.

The plaintiff in Courtland worked as a bartender and server at a franchised Buffalo Wild Wings restaurant. The plaintiff alleged that she was subjected to sexual discrimination, harassment and retaliation by the restaurant's general manager and an assistant manager. The plaintiff asserted Title VII claims against both the franchisee and the franchisor, Buffalo Wild Wings, Inc. The franchisor moved for summary judgment by arguing that it could not be held liable for the alleged employment discrimination claims because it was not the plaintiff's employer, nor was the franchisee its agent for purposes of vicarious liability.

In adjudicating this issue, the court found that the Ninth Circuit has adopted the agency test for determining when two entities are jointly liable for Title VII violations, under which the determination of whether one entity is an agent for another is determined based upon traditional rules of agency. The court found further that “[i]n the franchise context, an essential element of agency is the franchisor's right to control the franchisee's actions.”

Without specifically denominating it as such, the court in Courtland proceeded to enunciate as the controlling standard the “instrumentality test” articulated by the Wisconsin Supreme Court in Kerl and adopted by the Massachusetts Supreme Judicial Court in Depianti. Specifically, the Courtland court held that “[t]he predominant test for holding a franchisor vicariously liable is whether it controls or has the right to control the daily conduct or operation of the particular instrumentality or aspect of the franchisee's business that is alleged to have caused the harm.” The court found that the alleged “instrumentalivty of harm” in that case was properly characterized as the restaurant's managerial staff, since the plaintiff's Title VII claims were based on allegations that the restaurant's general manager demoted her from bartender to server because of her pregnancy and ultimately terminated her in retaliation for reporting sexual harassment by an assistant manager.

Much like the court in Depianti, the Courtland court cited the Wisconsin Supreme Court's decision in Kerl as illustrative of the rationale for accommodating the need for franchisors to exercise control over their franchisees in order to protect their trademarks, without being held vicariously liable for the franchisee's conduct in general. The court noted that Kerl reflected the majority view in other jurisdictions that “[t]he standardized provisions commonly included in franchise agreements specifying uniform quality, marketing and operational requirements and a right of inspection do not establish a franchisor's control or right to control the daily operations of the franchisee sufficient to give rise to vicarious liability for all purposes or as a general matter.”

The Courtland court observed that Buffalo Wild Wings, like most franchisors, wrote guidelines in its franchise agreement “in order to promote uniformity among franchisees and protects its good will.” The court found that the fact that Buffalo Wild Wings maintained strict guidelines about the presentation and operation of the franchised restaurant at issue did not establish, without more information, that the franchisor had control over the restaurant's managerial staff for purposes of vicarious liability for employment discrimination. The court held that “vicarious liability attaches for employment discrimination if the franchisor exerts daily control over the hiring, firing and supervision of franchisee employees.”

In analyzing the undisputed facts the Courtland court concluded that Buffalo Wild Wings did not exert such control. Specifically, the court held that the facts showed that the franchisor “worked with and trained the restaurant's management staff only to the extent necessary to protect its brand name and dictate product presentation.” The court found that the franchisor “did not mandate employee-related policies, was not involved in the daily staff management, and did not address employee grievances.” Consequently, the court concluded that Buffalo Wild Wings could not be held vicariously liable under an agency theory because it did not have control over the “instrumentality of harm” in this case.

Michael W. Tyler is a partner with Kilpatrick Townsend & Stockton LLP, residing in its Atlanta office where he leads the firm's Franchise Litigation Practice. He can be contacted at 404-815-6474 or at [email protected].

The Instrumentality Test For Determining Franchisor Vicarious Liability

Franchisor vicarious liability for alleged franchisee wrongdoing has been widely litigated for many years. However, two recent cases provide a fresh look at this issue and help to clarify the rationale and application of the “instrumentality test” commonly used to determine franchisor vicarious liability.

In Depianti v. Jan-Pro Franchising, Intl, Inc., Bus. Franchise Guide (CCH) ' 15,069 (Mass. Sup. Jud. Ct. June 17, 2013), the Massachusetts Supreme Judicial Court held that a franchisor may be vicariously liable for the conduct of a franchisee only when the franchisor controls or has the right to control the specific policy or practice which has caused the harm to the complaining plaintiff. More specifically, the court adopted the instrumentality test as the applicable standard to determine franchisor various liability in Massachusetts.

The plaintiff in Depianti was a janitorial cleaning services “unit franchisee” who, along with a number of other franchisees, filed a putative class action in the United States District Court for the District of Massachusetts against the defendant/franchisor Jan-Pro Franchising International, Inc. alleging, among other claims, unfair and deceptive business practices and misrepresentation, based upon the alleged conduct of a “regional master franchisee.” The franchisor, Jan-Pro, operated its franchise system by selling regional rights to use the Jan-Pro brand to “regional master franchisees.” Upon purchasing these rights, the regional master franchisees became the exclusive, de facto franchisors of the Jan-Pro brand within defined geographic areas. The regional master franchisees, in turn, sold the right to use the Jan-Pro brand to “unit franchisees,” such as the plaintiff. The plaintiff contended that Jan-Pro should be held vicariously liable for the alleged misconduct of the regional master franchisee.

The U.S. District Court sought clarification from the Massachusetts Supreme Judicial Court on a number of critical state law issues, including the applicable test for determining vicarious liability of franchisors. Specifically, the U.S. District Court certified the question of “[w]hether and how to apply the “right to control test” for vicarious liability to the franchisor-franchisee relationship.

In answering this question in the affirmative, the Massachusetts Supreme Judicial Court first enunciated the general rule for vicarious liability in Massachusetts that “[g]enerally vicarious liability may be imposed where the relation of master and servant existed at the time the plaintiff was injured, whereby the ' act of the servant was legally imputable to the master.” The court held further that “[t]he test to establish the existence of such a relationship is whether the alleged master had “power of control or direction over the alleged servant.” The court noted that “[i]t is not necessary that there be any actual control by the alleged master to make one his servant or agent, but merely a right of the master to control.”

In considering whether to extend this right to control test to the franchise context, the court observed that “[t]his test is not easily transferrable to the franchise relationship,” given the imperative of franchisors to exercise control over franchisees to protect their trademarks. The court noted that “[u]nder Federal law, a franchisor is required to maintain control and supervision over a franchisee's use of its mark or else the franchisor will be deemed to have abandoned its mark under the abandonment provisions of the Lanham Act.” The court thus found that the exercise of control for the protection of trademarks should not result in franchisors being deemed to have created a principal-agent relationship, since “the controls that franchisors are required to maintain under the Lanham Act are not intended 'to create a [F]ederal law of agency ' [or to] saddle the licensor with the responsibilities under [S]tate law of a principal for his agent.'” The court further found that “[b]roadly extending the general 'right to control test' for vicarious liability to the franchisor-franchisee relationship, where franchisors are obligated to maintain certain controls could have the undesirable effect of penalizing franchisors for complying with Federal law.” Consequently, the court concluded that “the 'right to control test' should be applied to the franchisor-franchisee relationship in such a way as to ensure that liability will be imposed only where the conduct at issue properly may be imputed to the franchisor.”

The Massachusetts court consequently looked to the decision of the Wisconsin Supreme Court in Kerl v. Dennis Rasmussen, Inc., 273 Wis. 2d 106,125 (2004), to adopt a modified version of the right to control test, known as the “instrumentality test.” The instrumentality test, as set forth in Kerl , provides that a franchisor may be held vicariously liable for the conduct of its franchisee only if the franchisor controls or has a right to control the daily conduct or operation of the particular “instrumentality” or aspect of the franchisee's business that is alleged to have caused the harm. The court in Depianti found that the instrumentality test of Kerl was in accord with the approach of the majority of the courts that have considered vic-arious liability in the context of the franchisor-franchsee relationship. In such cases, “the franchisor typically is found to be vicariously liable only in situations where it exercised considerable control over the franchisee and the specific instrumentality at issue in a given case .” (Emphasis added). Consequently, the court decided to “join these courts in concluding that a franchisor is vicariously liable for the conduct of its franchisee only where the franchisor controls or has the right to control the specific policy or practice resulting in harm to the plaintiff.”

Courtland v. GCEP-Surprise, LLC

In Depianti , the Massachusetts Supreme Judicial Court adopted the instrumentality test as the Massachusetts standard for determining franchisor vicarious liability, but it did not apply the test since it was only addressing the issue in the context of a certified question from the United States District Court. Courtland v. GCEP-Surprise, LLC, Bus. Franchise Guide (CCH) ' 15,101 (D.C. AZ July 29, 2013), however, does provide a recent example of the actual application of the instrumentality test in the context of an employment discrimination case. In Courtland, the United States District Court for Arizona held that a franchised restaurant employee could not hold a restaurant franchisor vicariously liable for the discriminatory conduct of the franchisee's employee.

The plaintiff in Courtland worked as a bartender and server at a franchised Buffalo Wild Wings restaurant. The plaintiff alleged that she was subjected to sexual discrimination, harassment and retaliation by the restaurant's general manager and an assistant manager. The plaintiff asserted Title VII claims against both the franchisee and the franchisor, Buffalo Wild Wings, Inc. The franchisor moved for summary judgment by arguing that it could not be held liable for the alleged employment discrimination claims because it was not the plaintiff's employer, nor was the franchisee its agent for purposes of vicarious liability.

In adjudicating this issue, the court found that the Ninth Circuit has adopted the agency test for determining when two entities are jointly liable for Title VII violations, under which the determination of whether one entity is an agent for another is determined based upon traditional rules of agency. The court found further that “[i]n the franchise context, an essential element of agency is the franchisor's right to control the franchisee's actions.”

Without specifically denominating it as such, the court in Courtland proceeded to enunciate as the controlling standard the “instrumentality test” articulated by the Wisconsin Supreme Court in Kerl and adopted by the Massachusetts Supreme Judicial Court in Depianti. Specifically, the Courtland court held that “[t]he predominant test for holding a franchisor vicariously liable is whether it controls or has the right to control the daily conduct or operation of the particular instrumentality or aspect of the franchisee's business that is alleged to have caused the harm.” The court found that the alleged “instrumentalivty of harm” in that case was properly characterized as the restaurant's managerial staff, since the plaintiff's Title VII claims were based on allegations that the restaurant's general manager demoted her from bartender to server because of her pregnancy and ultimately terminated her in retaliation for reporting sexual harassment by an assistant manager.

Much like the court in Depianti, the Courtland court cited the Wisconsin Supreme Court's decision in Kerl as illustrative of the rationale for accommodating the need for franchisors to exercise control over their franchisees in order to protect their trademarks, without being held vicariously liable for the franchisee's conduct in general. The court noted that Kerl reflected the majority view in other jurisdictions that “[t]he standardized provisions commonly included in franchise agreements specifying uniform quality, marketing and operational requirements and a right of inspection do not establish a franchisor's control or right to control the daily operations of the franchisee sufficient to give rise to vicarious liability for all purposes or as a general matter.”

The Courtland court observed that Buffalo Wild Wings, like most franchisors, wrote guidelines in its franchise agreement “in order to promote uniformity among franchisees and protects its good will.” The court found that the fact that Buffalo Wild Wings maintained strict guidelines about the presentation and operation of the franchised restaurant at issue did not establish, without more information, that the franchisor had control over the restaurant's managerial staff for purposes of vicarious liability for employment discrimination. The court held that “vicarious liability attaches for employment discrimination if the franchisor exerts daily control over the hiring, firing and supervision of franchisee employees.”

In analyzing the undisputed facts the Courtland court concluded that Buffalo Wild Wings did not exert such control. Specifically, the court held that the facts showed that the franchisor “worked with and trained the restaurant's management staff only to the extent necessary to protect its brand name and dictate product presentation.” The court found that the franchisor “did not mandate employee-related policies, was not involved in the daily staff management, and did not address employee grievances.” Consequently, the court concluded that Buffalo Wild Wings could not be held vicariously liable under an agency theory because it did not have control over the “instrumentality of harm” in this case.

Michael W. Tyler is a partner with Kilpatrick Townsend & Stockton LLP, residing in its Atlanta office where he leads the firm's Franchise Litigation Practice. He can be contacted at 404-815-6474 or at [email protected].