Franchisor Liability

(Originally appeared in Marketing Management, Winter 1996)

When people are injured at franchised businesses, they often sue the franchisee. But an increasing number of plaintiffs also are seeking to recover damages from franchisors. In recent years, for example, companies as diverse as Mobil Oil, Best Western International, and Domino's Pizza have been sued by their franchisees' or licensees' customers.

A claim against a franchisor seeking to recover for the carelessness (or, in the words of the law, the "negligence") of a franchisee has to overcome numerous hurdles to be successful. One of the most basic is that the mere fact of being a franchisor does not alone make the company responsible for the franchisee's negligence. To overcome this problem, plaintiffs have argued that a franchisee was a franchisor's "actual agent," and that, as a consequence, the franchisor should be held liable for the franchisee's actions under the rule that allows an injured party to hold a principal vicariously liable for the conduct of its agent.

Control Missing

Plaintiffs have not fared well with this kind of claim, though. Franchise agreements typically contain detailed language that makes it clear that a franchisor does not "control" the day-to-day activities of its franchisee. In practice, and as a matter of law, this lack of control limits the possibility that a court or a jury could find that a franchisee was a franchisor's actual agent.

Attempting to reach into another pocket, claimants have begun to assert a different claim. They contend that the franchisee was the "apparent agent" of the franchisor and argue that this should be sufficient to permit a court or jury to impose liability on the franchisor.

Some courts have rejected the use of the doctrine of apparent agency in these circumstances. Recently, however, the Illinois Supreme Court issued a decision that seemed to accept implicitly the use of the apparent agency theory by injured customers against franchisors. If other courts were to allow plaintiffs to base their lawsuits on claims of apparent agency, franchisors could see a significant increase in the number of lawsuits, ranging from employment law to personal injury and property damage, that they have to litigate -- as well as in the amount of damages they may have to pay out.

Inn Jeopardy

The difficulties faced by plaintiffs asserting actual agency claims against franchisors are illustrated by a case brought in a North Carolina state courrt several years ago by Sandye Lee Hayman against Ramada Inn Inc.

Hayman alleged in her complaint that she was asaulted while staying at a Ramada Inn in Winston-Salem, N.C. She asserted that Ramada Inn Inc. had been negligent because it had failed to provide adequate security for its patrons and failed to inform her of the crime rate in the motel's vicinity and on its grounds.

Ramada Inn Inc. asked the court to dismiss the case, contending that Hayman had sued the wrong party. It pointed out that the motel was owned by Turnpike Properties Inc. and not by Ramada Inn Inc.; that the facility was operated by Turnpike under the name Ramada Inn pursuant to a license agreement with Ramada Inn Inc.; that pursuant to the terms of that agreement, Turnpike was solely responsible for providing and maintaining security at the site; and that Ramada Inn Inc. had no control over, or authority to direct, the provision of security or other aspects of the motel's daily operation.

For her part, Hayman noted that the motel was identified on signs and in advertisements as "Ramada Inn." She also stated that during the several weeks she stayed there, she never saw any sign or other indication on the motel's property that indicated that anyone other than Ramada Inn Inc. owned, operated, or bore responsibility for the motel.

The court said that, under the law of actual agency, a franchisor's vicarious liability for the wrongs of a franchisee depends on the nature and extent of control and supervision retained and exercised by the franchisor over the methods or details of conducting the franchisee's day-to-day operations. It then determined that there was no evidence that Ramada Inn Inc. had retained or exercised the kind of detailed control over the daily operation of the motel that would establish a principal-agent relationship.

The court stated that the general purpose of the parties' 20-page license agreement was the maintenance of uniform service within, and public good will toward, the Ramada Inn system. In the court's view, the agreement primarily required the franchisee, Turnpike, to comply with certain standards in the construction, furnishing, and advertising of the motel. Apart from the imposition of a general duty upon Turnpike to maintain its accommodations "in a clean, attractive, safe, and orderly manner," the court said that the contract imposed no standards and made no other provision with respect to security of the property.

Moreover, the court said, under the agreement, Ramada Inn neither retained authority over nor established standards for the hiring, firing, supervision, or discipline of personnel "or myriad other details of the day-to-day operation." In addition, although Ramada Inn Inc. retained the right to conduct regular inspections of the accommodations to ensure compliance with the contract and rules of operation, the court found that its actual control was limited to a right to terminate the franchise agreement and collect damages for any noncompliance by Turnpike.

Accordingly, the court found that Turnpike was not the actual agent of Ramada Inn Inc. and that the franchisor could not be held liable to Hayman and dismissed the case.

Apparent Agency

The inability of plaintiffs to succeed on actual agency grounds has not deterred them from filing law-suits against franchisors. Instead, many file suits alleging apparent agency.

Under the law in most states, an apparent agent is a person who, whether authorized or not, reasonably appears to third persons to be authorized to act as an agent. An apparent principal that placesan apparent agent in a situation where that "agent" may be presumed to have authority to act is prohibited, as against a third party, from denying the authority. To prove apparent agency, a plaintiff must show that:

  • The "principal" consented to or knowingly acquiesced in the "agent's" exercise of authority.
  • The plaintiff had a good-faith belief that the "agent" possessed such authority.
  • The plaintiff relied, to his or her detriment, on the "agent's" apparent authority.
  • There is a crucial difference in the legal tests for whether an actual or apparent agency exists. With the former, the focus is on the actual relationship between the franchisor and franchisee. With the latter, the focus is on what the injured plaintiff reasonably believed.

Although the law has long recognized the doctrine of apparent agency, its use generally has been limited to business situations involving a contention that one party entered into a contract on behalf of another party; in other words, it generally has not been used in cases alleging negligence.

Hospital Sued

In 1993, however, the Illinois Supreme Court permitted the use of apparent agency in a negligence case brought by a patient's estate against the Sycamore Municipal Hospital. That case arose when Jack Gilbert suffered a heart attack and died several hours after being treated and released by a physician in the hospital's emergency room. Gilbert's estate sued the hospital for negligence. The trial court dismissed the complaint on the ground that the hospital could not be held vicariously liable because the emergency room physician was an independent contractor, not an actual agent of the hospital.

The Illinois Supreme Court reversed the decision to dismiss the complaint, finding that Gilbert's estate should have the opportunity to show that the physician was an apparent agent of the hospital. The court noted that there was ample evidence that the hospital had held the emergency room physician out to be its agent. For one thing, it never advised patients that emergency room physicians were independent contractors rather than hospital employees.

The court also pointed out that a consent form prepared by the hospital and signed by Gilbert stated in part "The undersigned has been informed of the emergency treatment considered necessary for the patient whose name appears above and that the treatment and procedures will be performed by the physicians and employees of the hospital."

It may be one thing to apply the apparent agency doctrine to a hospital emergency room where the status of the staff and physicians involved can be hard to discern, but should it be used in a franchisor/franchisee situation, where the legal relationships between the parties are quite clear? Reginald O'Banner argued that it should.

McDonald's Sued

O'Banner recently filed a lawsuit in an Illinois state court against McDonald's Corp. after he allegedly slipped and fell on ice or water in the bathroom of a franchised McDonald's restaurant in Chicago.

McDonald's asked the court to dismiss the suit on the grounds that the restaurant was actually owned by one of its franchisees and that the corporation did not own, operate, maintain, or control the facility. O'Banner responded that McDonald's could be vicariously liable for the acts and omissions of its franchisee based on the doctrine of apparent agency.

The trial court granted McDonald's Corp.'s motion to dismiss and O'Banner appealed to an intermediate Illinois appellate court. In its decision, the appellate court stated that it saw "no reason" to limit the apparent agency theory of vicarious liability as set out in the Gilbert case to a hospital setting.

It said that, just as patients "naturally depend on their chosen hospital to supervise and take responsibility for the conduct of those who work within the facility, it is logical to conclude that many members of the public have come to believe that franchisors such as McDonald's Corp. are ultimately responsible not only for the quality of the food, but also for the condition of the property in which it is served."

The court said that McDonald's Corp.'s "extensive and visible reach into every aspect" of the franchisee's business made such a belief natural. It noted that, under the terms of the license agreement, only designated food and beverages could be served at franchised restaurants; franchisees are required to use prescribed equipment, building layouts, and designs; and all restaurant employees are required to wear uniforms designated by McDonald's Corp.

In addition, the court found it significant that McDonald's Corp. "also dictates management, advertising, and personnel policies and additionally runs 'Hamburger University,' a training facility where its franchisees are required to train their managers." The court said that it presumed that the employees responsible for maintaining the bathroom facilities where O'Banner allegedly was injured wore McDonald's uniforms and were required to follow McDonald's prescribed standards of "quality, service, and cleanliness."

Accordingly, the court held that the degree of control exercised by the McDonald's Corp. over its franchisee, including the control exercised over the way in which the franchisee's business was promoted and advertised, created the potential for members of the public to be misled as to the entity responsible for maintaining the restaurant facilities. It then ruled that O'Banner had the right to have a jury determine whether this kind of conduct could lead a person such as O'Banner to enter the restaurant in reliance on McDonald's reputation of quality and upon a belief that he was in fact dealing with an agent of the McDonald's Corp.

Losing the War

McDonald's appealed to the Illinois Supreme Court, which ruled in its favor because O'Banner did not have enough facts to show that he relied on the claimed apparent agency. But in ruling for McDonald's, the court implicitly acknowledged that a plaintiff may sue and even prevail against a franchisor using an apparent agency theory if the plaintiff can "show that he actually did rely on the apparent agency in going to the restaurant where he was allegedly injured."

Certainly, now all Illinois franchisors will be sued for vicarious liability as apparent principals of their franchisees. McDonald's won its battle with O'Banner, but lost the war.

Franchisors'Actions

Most courts faced with the question of whether a franchisor may be vicariously liable for the acts of its franchisee have ruled that it may not. But the Illinois Supreme Court's decision in the case brought by O'Banner against McDonald's suggests that franchisors should pay additional attention to this issue.

For one thing, they may want to review all documentation, including franchisees' general liability insurance, to make certain that they are protected to the maximum extent possible. By the same token, they should ensure that franchisees take all appropriate action to limit the possibility that injured customers will claim they believed that the franchise was owned by the franchiser; this may mean, for example, that franchisors should strictly enforce provisions in license agreements requiring franchisees to display notices to the effect that their business is a franchised business that is not owned by the franchisor.

And, when a franchisor is challenged on an apparent agency ground in a state that has not decided either whether to accept that rationale or how the rationale should be applied, it should consider the costs and benefits of a vigorous defense. With these kinds of efforts, the practical effect of the Illinois Supreme Court's decision in the O'Banner case may be limited.


CITATIONS

  • O'Banner v. McDonald's Corp., 1996 WL 288068 (Ill. May 31, 1996).
  • Mobil Oil Corp. v. Bransford, 648 So.2d 119 (Fla. 1995).
  • Watson v. Howard Johnson Franchise Systems Inc., 453 S.E.2d 758 (Ga. Ct. App. 1995).
  • Parker v. Domino's Pizza Inc., 629 So.2d 1026 (Fla. Ct. App. 1993).
  • Myszkowski v. Penn Stroud Hotel Inc., 634 A.2d 622 (Pa. Sup. Ct. 1993).
  • Gilbert v. Sycamore Municipal Hospital, 622 N.E.2d 788 (Ill. 1993).
  • Chevron, U.S.A., Inc. v. Lesch, 570 A.2d 840 (Md. Ct. App. 1990).
  • Crinkley v. Holiday Inns Inc., 844 F.2d 156 (4th Cir. 1988).
  • Hayman v. Ramada Inn Inc., 357 S.E.2d 394 (N.C. Cl. App. 1987).