Franchisors Need to Exercise Caution to Avoid Vicarious Liability

Individuals injured at franchise locations often attempt to sue the franchisor, in addition to the franchisee, claiming the franchisor is vicariously liable for the injury. (The franchisor often has greater financial resources than the franchisee with which to settle the claim or pay a judgment). The vicarious liability standards vary among the states, but courts commonly look at the degree of actual control exercised by the franchisor over the operations of the franchisee, particularly in the area giving rise to the lawsuit. (For example, how much control the franchisor exercises over the franchisees hiring of its employees, if the injury claim arises out of the alleged negligent retention of an employee). Recent decisions make clear that while it is absolutely necessary for the franchisors franchise agreement to state that the franchisee is an independent business entity making its own business and hiring decisions, such contractual language is not sufficient to immunize and protect the franchisor from vicarious liability claims. In addition, the franchisor must critically examine the other provisions of its franchise agreement, as well as how it actually interacts with the franchisee, to minimize its control over the day-to-day aspects of the franchisees operation that are more likely to result in a successful vicarious liability claim, while, at the same time, preserving the operational uniformity of its franchise system. If you would like more information on this subject, please contact Steve Story at sestory@kaufcan.com. —Stephen E. Story