Reducing Brand’s Exposure to Liability (Part 1)

sharing-knowledge-franchisingFranchisors are often sued for injuries occurring on the premises of their franchisees simply because the injured person and his attorney do not understand the nature of franchising.

Most franchisors prescribe standards for operation by their franchisees that are designed to produce the highest quality product or service in a clean, safe environment. However, franchisees do not always follow these standards, and even when they do, accidents happen. With some personal injury lawyers suggesting that every injured person has someone he can sue for his injuries, it is inevitable that lawsuits will arise and the franchisor will be named in the lawsuit simply because its trademark was on the door. This article will explain how a franchisor can reduce its exposure to liability for these actions.

The Theory for Suing the Franchisor

Franchisors are often sued for injuries occurring on the premises of their franchisees, or caused by a franchisee’s actions simply because the injured person and his attorney do not understand the nature of franchising.

They believe that every McDonald’s or Burger King restaurant is owned by McDonald’s Corporation or Burger King Corporation. That is why a telephone call to the plaintiff’s attorney is always the first step in defending these actions, as the attorney may be willing to drop the franchisor from the lawsuit when they learn the franchisor was not the owner of the business.

However, there are two legal theories by which franchisors can be liable for these actions. One is the concept of “actual control,” where the franchisor controlled the action that led to the injury, or exercised so much control over the overall business that it is treated as owning that business. The other is a theory known as “apparent authority,” meaning the customer thought this was a company-owned location.

Actual Control

The law has always recognized that if you have an employee or agent who acts at your direction, you are liable for their actions. A franchisee is not an employee, but if he is acting at your direction, and that direction causes injury to the customer, then you are liable to that customer, even though it was not your business. For example, if you tell a franchisee to cook food at a certain temperature, and that temperature is too low to kill bacteria, then you will likely be liable for the consequences of your franchisees’ actions when they follow your directions.

The theory of “actual control,” also arises when you control so much of the business activities of your franchisees that you are truly controlling the business. While you need to prescribe standards that relate to the delivery of your service or product, review your operations manual to be certain you are not trying to control other aspects of the business.

A good rule of thumb is that you can prescribe standards for everything the customer sees (with exceptions for pricing), but you should do no more than suggest “best practices” for aspects of the business that a customer does not see. The latter would include hiring practices, compensating and overseeing employees, dealing with suppliers of products and services not central to the system, and similar matters.

Likewise, your standards for producing and delivering your service or product should typically be minimum standards, including specifically addressing policies designed to prevent injuries, but giving franchisees discretion to go beyond your minimum standards or requirements where it is appropriate to do so (particularly in providing a safe environment for employees and customers).

Injured persons will often point to your operations manual, and the requirement of your franchise agreement that franchisees must comply with the operations manual, as evidence of your control of the business. Thus, beyond reviewing your manual and deleting unnecessary controls, you should include in your franchise agreement an acknowledgment by the franchisee that the manual is designed to protect your standards and systems, and your names and marks, and not to control the day-to-day operation of the business. If your manual includes suggested best practices, your agreement should also make clear that the franchisee is only required to comply with mandatory provisions of the manual.

… go to Part 2