Opinion ID: 1867072
Heading Depth: 2
Heading Rank: 2

Heading: Franchising and Franchisor Vicarious Liability

Text: ¶28 Franchising is a business arrangement that takes a variety of forms, including product franchises, business format franchises, and certain kinds of dealerships. 1 W. Michael Garner, Franchise and Distribution Law and Practice § 1:11-1:19 (2003). The franchise in this case is an example of business format franchising, characterized by the sale of a product or service under the franchisor's trademark pursuant to specified quality, marketing, and operational standards. Id. § 1:14, at 1-29. A franchise relationship is a marriage of convenience. It enables franchisors to spread the capital cost of enlarging the market for their goods and services by transferring most of those costs to local franchisees. The franchise arrangement enables the franchisor to reach new, far-flung markets without having to directly manage a vast network of individual outlets. For the franchisee, the arrangement mitigates the risks of starting a new business by enabling it to capitalize on the good will and established market associated with the franchisor's trademark or trade name. The burdens of starting and operating a business are eased considerably by the franchisor, which provides quality and operational methods and standards, and may offer management training programs to the franchisee. See 1 Garner, supra, § 1:3-1:4. ¶29 Use of franchise models has mushroomed in recent years. See 1 Garner, supra, § 1:8-1:9. Once confined almost exclusively to automobile dealerships and gasoline stations, franchising has proliferated in this country, accounting for approximately $1 trillion in annual U.S. retail sales in 2000, representing over 40 percent of all U.S. retail sales. International Franchise Association, ABC's of Franchising, http://www.franchise.org/resourcectr/faq/q4.asp; see also IFA Educational Foundation, The Profile of Franchising, (Feb. 2000), http://www.franchise.org/edufound/profile/profile.asp; Michael R. Flynn, [Note], The Law of Franchisor Vicarious Liability: A Critique, 1993 Colum. Bus. L. Rev. 89, 90; 1 Garner, supra § 1:1, at 1-4. ¶30 The expansive growth in franchising has produced changes in the law governing these business relationships. See, e.g., Wis. Stat. § 135.01 et seq. (2001-02), the Wisconsin Fair Dealership Law. Although the issue of franchisor vicarious liability is one of first impression in Wisconsin, the adaptation of the law of agency to the franchise context has been the subject of case law in other jurisdictions. ¶31 Most courts that have addressed the issue of franchisor vicarious liability have assumed that respondeat superior applies in the franchising context and have adapted the traditional master/servant control or right to control test to determine whether the relationship between the franchisor and franchisee should give rise to vicarious liability. As a general matter, however, the usual justifications for vicarious liability lose some force in the franchising context, and the control or right to control test for determining the presence of a master/servant agency is not easily transferable to the franchise relationship. ¶32 As we have noted, a franchise is a commercial arrangement between two businesses which authorizes the franchisee to use the franchisor's intellectual property and brand identity, marketing experience, and operational methods. It is quite different from a contract of employment. For one thing, it is the franchisee that pays, not the franchisor. Furthermore, although franchise agreements typically impose detailed requirements on the franchisee's operations (more on that later), the existence of these contractual requirements does not mean that franchisors have a role in managing the dayto-day operations of their franchisees. To the contrary, the imposition of quality and operational requirements by contract suggests that the franchisor does not intervene in the daily operation and management of the independent business of the franchisee. ¶33 In addition, because many franchise relationships include a license to use the franchisor's trade or service mark, the detailed quality and operational standards and inspection rights specified in the franchise agreement are integral to the protection of the franchisor's trade or service mark under the Lanham Act. 15 U.S.C. § 1051 et seq.; see also Flynn, supra; Randall K. Hanson, The Franchising Dilemma Continues: Update on Franchisor Liability for Wrongful Acts by Local Franchisee, 20 Campbell L. Rev 91 (Winter 1997); Randall K. Hanson, The Franchising Dilemma: Franchisor Liability for Actions of a Local Franchisee, 19 N.C. Cent. L.J. 190. The purpose of the Lanham Act, however, is to ensure the integrity of registered trademarks, not to create a federal law of agency . . . [or to] automatically saddle the licensor with the responsibilities under state law of a principal for his agent. Oberlin v. The Marlin Am. Corp., 596 F.2d 1322, 1327 (7th Cir. 1979). ¶34 Accordingly, the premises of vicarious liability weaken when applied to a claim that a franchisor should be held strictly liable for the torts of its franchisee. The control of a franchisor does not consist of routine, daily supervision and management of the franchisee's business, but, rather, is contained in contractual quality and operational requirements necessary to the integrity of the franchisor's trade or service mark. The perceived fairness of requiring a principal who closely controls the physical conduct of an agent to answer for the harm caused by the agent is diminished in this context. ¶35 Similarly, while the rationale of encouraging safety and the exercise of due care is present in the domain of franchising, as elsewhere, it has less strength as a justification for imposing no-fault liability on a franchisor. The typical franchisee is an independent business or entrepreneur, often distant from the franchisor and not subject to day-to-day managerial supervision by the franchisor. The imposition of vicarious liability has less effectiveness as an incentive for enhancing safety and the exercise of care in the absence of the sort of daily managerial supervision and control of the franchise that could actually bring about improvements in safety and the exercise of care. ¶36 In light of these considerations, the clear trend in the case law in other jurisdictions is that the quality and operational standards and inspection rights contained in a franchise agreement do not establish a franchisor's control or right of control over the franchisee sufficient to ground a claim for vicarious liability as a general matter or for all purposes. [5] See Wendy Hong Wu v. Dunkin' Donuts, Inc., 105 F.Supp.2d 83, 87-94 (E.D.N.Y. 2000)(restaurant franchisor not vicariously liable for security lapses associated with rape of franchisee employee because franchise agreement did not give franchisor considerable control . . . over the specific instrumentality at issue, i.e., security at franchised restaurant); Pizza K., Inc. v. Santagata, 547 S.E.2d 405, 406-07 (Ga. Ct. App. 2001)(pizza franchisor not vicariously liable for auto accident caused by franchisee delivery driver because, although franchise agreement contains specific and even strict requirements concerning operation of franchise, franchisor was not authorized under the agreement to exercise supervisory control over the daily activities of [franchisee's] employees); Viches v. MLT, Inc., 127 F. Supp. 2d 828, 832 (E.D. Mich. 2000)(hotel franchisor not vicariously liable for franchisee's negligent use of pesticides where franchise agreement does no more than insure uniformity and standardization . . . of services). ¶37 See also Perry v. Burger King Corp., 924 F.Supp. 548, 554 (S.D.N.Y. 1996)(restaurant franchisor entitled to summary judgment on claim of vicarious liability for racial discrimination by franchisee because franchise agreement did not provide that franchisor had control over employment matters at franchisee); Schlotzsky's, Inc. v. Hyde, 538 S.E.2d 561, 563 (Ga. Ct. App. 2000)(where patron of franchise restaurant contracted Hepatitis A from tainted food, franchise agreement establishing mandatory standards for food preparation and service quality did not mean that franchisor could direct or control manner and method of performance of the daily operations of the franchise, affirming summary judgment in favor of franchisor); Holiday Inns, Inc. v. Newton, 278 S.E.2d 85, 86 (Ga. Ct. App. 1981)(where motel patron was assaulted by third party on premises of franchised motel, franchisor not vicariously liable because agreement gave no control, or right to control, the methods or details of doing the work of the franchisee); Little v. Howard Johnson Co., 455 N.W.2d 390, 393-94 (Mich. Ct. App. 1990)(restaurant franchisor not vicariously liable for injuries of patron who slipped on ice at franchisee's restaurant, since uniformity and standardization of products provisions in franchise agreement do not affect the control of daily operations). ¶38 See also Hart v. Marriott International, Inc., 758 N.Y.S.2d 435, 438 (2003)(hotel franchisor not vicariously liable for slip-and-fall injury sustained by hotel patron where franchise agreement did not give franchisor control over the manner of performing the very work in the course of which the accident occurred); Hayman v. Ramada Inn, Inc., 357 S.E.2d 394, 397 (N.C. Ct. App. 1987)(motel franchisor not vicariously liable for injuries resulting from franchisee's negligent security because there was no evidence that [franchisor] retained or exercised . . . detailed control over the daily operation of the [franchisee]); Smith v. Foodmaker, Inc., 928 S.W.2d 683, 687-88 (Tex. App. 1996)(restaurant franchisor not vicariously liable for murder of franchisee's employee by a fellow employee because franchisor had no right of control over the hiring practices, terms or conditions of [franchisee's] employees). ¶39 These courts have adapted the traditional master/servant control or right to control test to the franchise context by narrowing its focus: the franchisor must control or have 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 before vicarious liability may be imposed on the franchisor for the franchisee's tortious conduct. The quality and operational standards typically found in franchise agreements do not establish the sort of close supervisory control or right to control necessary to support imposing vicarious liability on a franchisor for the torts of the franchisee for all or general purposes. ¶40 For example, in Pizza K., the Georgia Court of Appeals held that a pizza franchisor was not vicariously liable for an auto accident caused by one of its franchisee's delivery drivers, because neither the franchise agreement nor any record evidence demonstrated that the franchisor controlled the franchisee's day-to-day hiring, firing, or supervision of delivery drivers. Pizza K., 547 S.E.2d at 407. Although the franchise agreement in Pizza K. contained many operational and quality-control standards and a right to inspect and terminate for noncompliance with those standards, the court concluded that these contractual provisions did not amount to day-to-day supervisory control over the franchisee, but, rather, simply served as a means of achieving a desired level of uniformity and quality within the system of Pizza K. franchises. Id. ¶41 In Wu v. Dunkin' Donuts, the United States District Court for the Eastern District of New York refused to impose vicarious liability on a franchisor for a rape that occurred on the franchisee's premises because there was no evidence that the franchisor had day-to-day control or a considerable degree of control over the instrumentality at issue, there, the security operations of the franchisee. Wu v. Dunkin' Donuts, 105 F. Supp.2d at 87. The court noted that [a]lthough the control that DD exercises under the franchise agreement is considerable, it is primarily designed to maintain uniform appearance among its franchisees and uniform quality among their products and services to protect and enhance the value of the Dunkin' Donuts trademark. [The franchisee] remains solely responsible for hiring, firing, and training its employees and for making all day-to-day decisions necessary to run the business. Id. at 90-91. The contractual control consisting of the imposition of quality and operational standards was insufficient to support the claim of vicarious liability. Id. at 94. ¶42 On the other hand, in Miller v. McDonald's Corp., 945 P.2d 1107 (Or. Ct. App. 1997), the Oregon Supreme Court reversed a grant of summary judgment on a claim of franchisor vicarious liability where the plaintiff was injured when she bit into a sapphire stone while eating a Big Mac sandwich at a McDonald's franchise. The franchise agreement and an operations manual incorporated into the agreement established that precise methods of food handling and preparation were imposed by the franchisor, McDonald's. Id. at 1111. Because the plaintiff alleged that the franchisee's deficiencies in those functions resulted in the sapphire being in the Big Mac, the court concluded that there was an issue of fact for trial on whether the franchisor had the right to control the franchisee in the precise part of its business that allegedly resulted in plaintiff's injuries. Id. Miller appears to run contrary to the prevailing rule that quality and operational standards contained in a franchise agreement are generally insufficient to support franchisor vicarious liability. Miller is, however, consistent with the current consensus to the extent that it focused on the particular aspect of the franchisee's business that was alleged to have caused the harm. ¶43 Consistent with the majority approach in other jurisdictions, we conclude that the 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. We hold that a franchisor may be held vicariously liable for the tortious conduct of its franchisee only if the franchisor has control or a right of control over the daily operation of the specific aspect of the franchisee's business that is alleged to have caused the harm.