Franchisor: Enforce the Agreement or be On the Hook


By: Jeff Grate

Recently, in defending a franchisor allegedly responsible for the negligence of its franchisee, an interesting issue arose out of the  denial of the franchisor’s motion for summary judgment. Before preparing our motion, we understood the existing case law to be well settled and straight forward. That is, the franchisor is not liable for the negligent acts of the franchisee as long as the franchisor does not exercise control over the operation of the franchisee’s business on a day-to-day basis or assume any responsibility for the franchisee’s debts. Of course, the franchisor may impose requirements and standards under the franchise agreement and may assure compliance by conducting regular  inspections and imposing penalties. In general, monitoring compliance with the franchise agreement is simple and subjective. Unfortunately, due to the complexity of the inspections, sometimes something as seemingly unimportant as the posting of a sign identifying the business as a franchise is overlooked.

In our case, the franchise agreement, among other things,  required that the franchisee conspicuously post a sign identifying the corporate owner of the franchise and informing all patrons that the business was being operated under the trade name of the franchisor. According to the director, this was done. Unfortunately, when suit was filed, the business was operating under another name, as it had its franchise revoked. As part of the revocation, all proprietary materials were confiscated by the franchisor and the franchisee discarded all records not required to be kept under state law.  In short, there was not any hard evidence that, at the time of the incident, the franchisee had posted the required notice or that the franchisor took steps to assure that one was posted. The franchisor’s inspection reports did not indicate that the franchisee complied with  this requirement.

In opposing the franchisor’s motion, plaintiff claimed that she was unaware the business was an independently owned and operated  franchise and  represented that she never would have patronized the business had she known. In ruling on our motion, the trial court focused on whether the plaintiff was informed or should have had knowledge that she was dealing with an independently owned business, as opposed to the more widely known franchisor. In denying our motion the court felt that, in the face of scant evidence that the required sign was conspicuously posted, there was a question of fact as to whether the franchisor operated as such. On appeal,  the denial of our motion was reversed, with the Court of Appeals stressing that although the required sign was not posted, plaintiff should have been aware that the business was being operated as a franchise, as the enrollment contract signed by the plaintiff identified the franchisee. All other evidence showed that the franchisor enforced the agreement.

This entire experience highlights that something as basic as not posting a sign can result in tort liability for a franchisor. This case also illustrates the attitude of the lower courts in interpreting simple objective requirements of a franchise agreement. It emphasizes that a franchisor must actively enforce all provisions, especially the simple straightforward ones, or face the possibility being liable for the franchisee’s negligence. A franchisor must make certain that its franchisee informs the general public that the franchisee is just that.