As a franchisor, what is my exposure to vicarious liability for tortious acts of franchisees?
Often, key variables are the nature and degree of the franchisor's “control” over franchisees, actual or apparent. The Supreme Court of Florida has observed the following:
Franchisors may well enter into an agency relationship with a franchisee if, by contract or action or representation, the franchisor has directly or apparently participated in some substantial way in directing or managing acts of the franchisee, beyond the mere fact of providing contractual franchise support activities.
Mobil Oil Corp. v. Bransford, 648 So. 2d 119, 120 (Fla. 1995). As a result, franchisors should be mindful of both actual and apparent agency relationships.
Actual agency relies on actual control
Generally, actual agency relationships require the following: “1) acknowledgment by the principal that the agent will act for him or her, 2) the agent's acceptance of the undertaking, and 3) control by the principal over the actions of the agent.” Font v. Stanley Steemer Intern., Inc., 849 So. 2d 1214, 1216 (Fla. 5th DCA 2003) (citations omitted) (boldface added). When acting in the scope of such a relationship, a franchisee-agent can thus create liability for its franchisor-principal through actions, omissions or statements. Franchisors are vulnerable under an agency theory “when the franchisor has direct control of, or the right to control, the day-to-day operations of the franchisee.” Domino's Pizza, LLC v. Wiederhold, 248 So. 3d 212, 222 (Fla. 5th Dist. App. 2018) (boldface added).
Generally, the Federal Trade Commission (FTC) contemplates, in its definition of “franchise,” that a “franchisor will exert or [will have] authority to exert a significant degree of control over the franchisee's method of operation, or provide significant assistance in the franchisee's method of operation.” 16 C.F.R. § 436.1(h)(2). Not to mention, control measures serve legitimate business objectives in the franchise model. Indeed, they are often intended to minimize liability in certain areas (e.g., safety-incident management).
Collectively, these conflicting effects create a formidable risk-management dilemma for franchisors.
Apparent agency relies on apparent control
On the other hand, apparent agency can be more subtle:
In cases of alleged apparent agency, something must have happened to communicate to the plaintiff the idea that the franchisor is exercising substantial control. [Florida] law is well settled that an apparent agency exists only if each of three elements are present: (a) a representation by the purported principal; (b) a reliance on that representation by a third party; and (c) a change in position by the third party in reliance on the representation.
Bransford, 648 So. 2d at 121 (citations omitted). But what would such a “representation” entail? In Bransford, the court effectively clarified a safe harbor:
[I]t is well understood that the mere use of franchise logos and related advertisements does not necessarily indicate that the franchisor has actual or apparent control over any substantial aspect of the franchisee's business or employment decisions. Nor does the provision of routine contractual support services refute this conclusion.
Id. at 120 (boldface added). Specifically, the court held that “trademark symbols, [franchisor] products, and franchise support” did not constitute an implied representation of control. Id. at 121. It similarly observed that “actual ownership of [an outlet's] premises is relevant only to the extent it may indicate some degree of actual or apparent control over the business.” Id.
Minimizing a franchisor's exposure
Based on the FTC's recent request for information,(1) many franchisors anxiously await proposed changes to the franchise model. According to the request, an area of broad interest to the Commission concerns “the means by which franchisors exert control over franchisees and their workers.” If the FTC modifies the franchise regulatory framework, as seems likely, and curtails what it perceives as excessive franchisor control, one potential upside could be reduced exposure to vicarious liability.
Regardless, franchisors are well positioned to limit their liability risk by closely managing their control and avoiding “representations” that their statements and actions may be communicating to potential plaintiffs. This probably sounds easier than it actually is.
Even so, there are questions franchisors can ask themselves regarding control measures: Do they permit the franchisor, either expressly or as a practical matter, to exercise both sole discretion over pricing and near-exclusive control over non-labor variable costs? If so, are such controls indispensable? Is the scope of monitoring franchisee systems commensurate with the franchisor's needs to ensure uniformity, maintain quality standards, protect its intellectual property, etc.? Can the franchisee effectively manage operations based on local market conditions? In the areas of working conditions and wages, is franchisee decision-making materially distorted by artificial benchmarks and incentives? And so forth.
To an extent, franchisors can methodically eliminate the risks of excessive controls, both actual and apparent. E.g., they can scrutinize their future franchise agreements, line by line. Revise them to remove any ambiguity regarding ownership and operator roles. Precisely define responsibilities, duties, and boundaries. Pay attention to liability-prone parts of the business, but don't confine revisions solely to these areas. Regarding specific controls, carefully evaluate the extent to which they shape the uniformity of offerings, quality of goods or services, or customer experiences. Consider whether they, alternatively, unduly meddle with “day-to-day operations,” without advancing objectives relating to uniformity, quality, or the protection of intellectual property interests. For instance, if numerous requirements are designed simply to boost revenue streams to affiliates of the franchisor (e.g., required purchases from designated suppliers), and they are immaterial to uniformity or quality objectives, etc., they may increase the likelihood that an agency will be found.
When reviewing the agreements, franchisors can cross-reference other “Item 22” contracts, along with the current FDD itself, to ensure all agreements and disclosures are consistent in their assumptions. Also, in the operating manual, reinforce boundaries and defined functions in greater depth, including in the context of specific production and distribution activities. (Of note, based on the FTC's request for information, certain unilateral changes to operating manuals are under scrutiny.) Also, design or strengthen controls at the franchisor level, including those to prevent employees from providing unauthorized assistance (even if a franchisee requests it). Documentation aside, if appropriate boundaries aren't respected in practice, franchisors place themselves at risk.
One way to ensure that documentation and practices with vicarious liability implications aren't overlooked is to incorporate them into periodic risk assessments, as deemed “compliance” risks. Then, a franchisor might weigh the liability exposure, by probability, and account for the individual or cumulative effects in a cost-benefit analysis.
Franchisors are well advised to manage their exposure to vicarious liability by speaking to an attorney and formulating a comprehensive plan.
(1) Solicitation for Public Comments on Provisions of Franchise Agreements and Franchisor Business Practices, issued March 10, 2023.
Content posted August 1, 2023.
