In an emerging trend, many courts are refining the traditional control test to fit the franchise business model and have imposed vicarious liability only when the franchisor either possessed the right to control the particular activity (or “instrumentality”) giving rise to the claim or in fact controlled it. The Idaho Supreme Court recently added to, and arguably expanded upon, this trend in Alesha Ketterling v. Burger King Corporation, 272 P.3d 527 (2012).
II. Traditional Control Test
A franchisor’s control, in varying degrees, over its franchisees’ business operations is inherent in the franchise relationship. A franchisor must exercise some degree of control over its franchisees’ operations in order to protect the franchisor’s trademarks and the integrity of the franchise system. After all, without some broad control, the uniformity that consumers expect from franchised establishments would be difficult, if not impossible, to achieve. Yet it is the franchisees that own and operate their businesses, and they are intended to do so as independent parties. However, when a franchisor exercises significant control over the day-to-day operations of its franchisees’ businesses, the franchisor may be held to be directly or vicariously liable for the acts and omissions of its franchisees under an agency theory.
Although courts frequently have applied the traditional common law “control” test to determine whether a franchisor (principal) is vicariously liable for the acts or omissions of its franchisees (agents), it does not work well in the franchise context. Many courts, over the last decade, have come to this conclusion. “Courts are generally mindful that a franchisor does have a legitimate interest in retaining some degree of control in order to protect the integrity of the marks” and, as a result, “courts have found that retaining certain rights such as the right to enforce standards, the right to terminate the agreement for failure to meet standards, the right to inspect the premises, the right to require that franchisees undergo certain training, or the mere making of suggestions and recommendations does not amount to sufficient control” to subject the franchisor to vicarious liability. Hunter v. Ramada Worldwide, Inc., 2005 WL 1490053, *6 (E.D. Mo. June 23, 2005).
While courts recognize that franchisors must ensure uniformity within the franchise system, imposing a strict system of standards may create a risk that the franchisor will be deemed to be exercising “day-to-day” control over the franchisee so that vicarious liability should be imposed. Franchisors, then, must strike the right balance between exerting the necessary control to ensure uniformity and not exerting too much control, which may create vicarious liability.
Franchisors often regulate and impose standards on their franchisees’ activities through the contractual imposition of system standards. Typically, system standards are authorized in the franchise agreement and detailed in the franchisor’s operations manual, which may be revised or supplemented at the franchisor’s election. In making a vicarious liability claim, a plaintiff’s lawyer often looks to the franchisor’s right to impose and/or the actual imposition of the system standards set forth in the operations manual as evidence of the requisite control over the franchisee’s operations.
For example, in Parker v. Domino’s Pizza, Inc., 629 So.2d 1026 (Fl. Ct. App. 1993), the court looked to the franchisor’s operations manual to determine whether the franchisor had the right to control the means to be used by its franchisees to accomplish required tasks. The court characterized the franchisor’s manual as a “veritable bible for overseeing a Domino’s operation” and commented that the manual “literally [left] nothing to chance.” Id. at 1029. Based on such findings, as well as multiple items in the franchise agreement that also established the franchisor’s right to control the franchisee’s operations, the court denied summary judgment and permitted the jury to decide whether the franchisor exercised sufficient control to be vicariously liable for injuries sustained by the plaintiff in a car accident caused by the franchisee’s delivery employee.
III. Emerging Trend and the Ketterling Case
In an effort to refine the traditional control test to better fit the franchise business model, many courts are following an emerging trend of imposing vicarious liability only when the franchisor either possessed the right to control the particular activity (or “instrumentality”) giving rise to the claim or in fact controlled it. Thus, a general right to control some aspects of the franchisee’s operations is not sufficient; instead, the franchisor must control the particular course of conduct giving rise to the plaintiff’s claim. See, e.g., Papa John's Int'l, Inc. v. McCoy, 244 S.W.3d 44 (Ky. 2008); Kerl v. Dennis Rasmussen, Inc., 682 N.W.2d 328 (Wis. 2004); Rainey v. Langen, 998 A.2d 342 (Me. 2010). The Ketterling case is a recent example of this emerging line of cases.
In Ketterling, a Burger King customer slipped and fell in the parking lot of a franchised Burger King. 272 P.3d at 528. The customer alleged that Burger King’s failure to ensure that the premises were safe was negligent and entitled her to damages for her injuries. Id. Burger King moved for summary judgment, which the district court granted on the ground that Burger King, as franchisor, did not control the premises where the customer fell and therefore had no vicarious liability for the injuries. Id. The customer appealed.
On appeal, the Idaho Supreme Court recognized that the critical issue was the extent of control the franchisor exerted over the operation of the franchised business: “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.” Id. at 533 (citation omitted). While it was undisputed that Burger King did not own the premises where the customer fell, the customer relied exclusively on Burger King’s operations manual, which required franchisees to clear snow and ice from the premises, to argue that Burger King had a right of control over the day-to-day operations of the location and should therefore be liable for the franchisee’s negligence. Id.
The court took notice that the operations manual did in fact instruct franchisees to clear snow and ice from the premises as soon as possible. Id. The manual also instructed franchisees to shovel snow from walks, apply ice melt, display caution signs, and replace ice melt when needed. Id. However, quoting a provision from the manual that stated that the franchisee was “an independent owner and operator of the restaurant who is responsible for the day-to-day operations of the business,” the court concluded that Burger King could not be vicariously liable because the operations manual did not establish that Burger King had a right of control over the daily activities of the franchised unit. Id.
Thus, although the manual specifically provided rules concerning the specific aspect of the business alleged to have caused the harm (i.e., the failure to remove ice from the parking lot), the court found that general language in the manual providing that the franchisee was an independent owner and operator responsible for the day-to-day operations in conjunction with the fact that the operations manual did not show that the franchisor had control over the daily activities of the franchised business was enough to preclude vicarious liability. Id. It is reassuring to note that the court took into consideration the often boilerplate language in franchise agreements and manuals stressing that the franchisee is an independent owner and operator and responsible for the day-to-day operations in reaching its decision. However, the court may have decided the issue differently if there were more detailed requirements in the manual regarding the methods to be used in removing ice and the number of times per day the franchisee was required to employ such methods. For example, if the manual required that the franchisee purchase a particular tool for ice removal and use it every hour during days where the temperature was less than freezing, a court might find that the franchisor had exerted sufficient control so as to be subject to vicarious liability.
IV. Not So Fast
Despite the emerging trend, contrary decisions remain a real possibility. For example, in Solis v. McDonald's Corp., J.S.C., 2011 WL 2746539 (Sup. Ct. N.Y. Cty. July 7, 2011), a New York trial court reached a different result when a customer sued McDonald’s Corp. after slipping and falling at a franchised McDonald’s restaurant. The customer alleged that his injuries were caused by negligence in the maintenance of the restaurant. Id. Denying McDonald’s Corp.’s motion for summary judgment, the court stated that the key issue in determining vicarious liability was whether the franchisor exercised control over the day-to-day operations of its franchisee. Id. McDonald’s Corp. denied exercising control over the day-to-day operations, but the court found triable issues of fact since, inter alia, McDonald’s Corp. owned the subject premises and maintained substantial control and dominion over the operations of the restaurant. Id. The court emphasized that the franchisee was required to construct and prepare the premises in accordance with McDonald’s Corp.’s plans and specifications and the franchisee was prohibited from altering the premises without prior written approval from McDonald’s Corp. Id. In addition, the court noted that the manual issued to the franchisee set forth guidelines for maintaining safe operations and the franchise agreement granted McDonald’s Corp. the right to inspect the premises at all times to insure compliance with the standards and policies for the system. Id. Further, a McDonald’s Corp.’s Operations Consultant testified that he performed multiple inspections at the location for the purpose of promoting cleanliness, identifying disrepair, and improving the overall operations. Id. With these facts, the court denied McDonald’s Corp.’s motion for summary judgment, concluding that there were triable issues of fact as to whether McDonald’s Corp. exercised control over the day-to-day operations of the franchisee. Id.
While the emerging “instrumentality” cases are an encouraging trend for franchisors and provide some welcome guidance to franchise lawyers, courts continue to be unpredictable in their treatment of vicarious liability in the franchise context. It is nearly impossible to implement system standards and requirements, which are necessary to protect the brand and achieve system-wide uniformity, without exposing the franchisor to potential claims for vicarious liability. For that reason, it is vital that a franchisor employ properly-drafted operating manuals and franchise agreement provisions which strike the appropriate balance between protecting its trademarks and system through appropriate system-wide standards of operation and maintaining the franchisee’s independence and ultimate responsibility for managing the day-to-day operations of its business.