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At the most recent International Franchise Association Legal Symposium, one of the most interesting programs concerned when a franchisor is responsible legally for the actions of a franchisee.
There are two points of distinction here with regard to liability: "Apparent Agency" and "Actual Agency."
Apparent Agency means that a customer reasonably believes that the he or she is being served by a particular company or "principal." For example, when you are buying a Whopper® do you have reason to know that the restaurant is not owned by Burger King Corporation? To avoid this type of liability, a franchisor should require each franchisee to notify the customers that the business is independently owned and operated. Any written marketing materials, contracts, or invoices provided to the customer by the franchisee should say that the business or office is "independently owned and operated" and, where possible, specifically identify the franchisee as the local owner. Franchisors also should require franchisees to file a Trade Name (or "doing business as") disclosure with their state to put others on notice that, for example, the operator of the Burger King at "123 Washington Road" in Baltimore is "ABC Burger, Inc.," not Burger King Corporation.
Disclosure is not the only issue, however. Control over the actions or delivery of service by the franchisee is also important to avoid liability under a theory of "Actual Agency."
Specifically, franchisors should closely examine the way in which operations manuals and other procedures are written. If they prescribe specific step-by-step requirements that the franchisee must follow in a wide variety of areas, the franchisor could be held responsible if the franchisee is sued by a customer. (This is comparable to an employer being responsible for any poor service or negligence on the part of an employee, because the employer has direct, day-to-day control over how its employees perform their jobs.)
It is far safer for the franchisor, from a liability standpoint, to set forth performance requirements that the franchisee must meet (i.e., a customer satisfaction rating of at least 75%) and then use the operations manual to provide advice on ways to achieve that required score. Consider a statement such as: "These are simply suggestions, but ultimately it is up to you, the franchisee, to design a program to reach stated goals."
But there is an exception to this recommendation. While operations manuals in general should not be too prescriptive, in matters that directly concern the health and safety of the ultimate customer it is important to provide specific requirements, because it is very possible that a court may hold the franchisor responsible unless it made reasonable efforts to protect customer's health or safety.
For example, for companies which provide services in individuals' homes or private offices, courts have held that franchisor have a duty to require that their franchisees engage in any pre-employment background checks and not hire employees who have criminal records or even references that indicate a violent or sexually abusive temperament. In those types of businesses, the franchisor need a process for ensuring the checks are being done by the franchisees on a regular or random basis. It is appropriate for the franchisor to request records or invoices for such background checks to ensure the requirements are being taken seriously.
Of course, the converse of this advice is true for franchisees: if you followed the franchisor's required specifications on how to provide a particular service, and then got sued as result of providing that service exactly as the franchisor required, then you (or your liability insurer) may have a valid claim for indemnification by the franchisor. A similar analysis may apply if you use the franchisor-mandated background check service, that service fails to inform you of an applicant's criminal history, and the actions of that employee result in a customer claim. However, as a franchisee if you are in a position to negotiate terms of the franchise agreement, you also should seek explicit rights to indemnification by the franchisor in these types of situations.