Contributed by Elizabeth Sigety
Continuing the often discussed theme of the vicarious liability of a franchisor for a franchisee’s actions, two recent courts have refused to dismiss claims which could hold a franchisor liable for the alleged actions of a franchisee. Both courts relied on the theory of implied or apparent agency to reach their decision. While admitting that these cases may not survive based on actual agency, which is typically created by an express agreement of agency (something usually refuted in a franchise agreement), implied or apparent agency can be found from the conduct of the parties. Whether such agency exists or not is a question of fact.
The first case is Soto vs. Superior Telecom, Inc., 2010 WL 2232145 (S.D. Cal. June 2, 2010) in which the plaintiff brought suit against a 7-Eleven franchisee and 7-Eleven. 7-Eleven moved to get the case dismissed against it on the basis that the franchisee was an independent contractor. Because of the high level of control that 7-Eleven had over its prepaid phone card product, which was required to be sold by the franchisee and in which the franchisor had a share in the profit, the court refused to dismiss the case, reasoning that a jury could find that 7-Eleven exercised enough control over the franchisee with respect to this product to support a finding of implied agency.
On a similar note, in Bauer v. Douglas Aquatics, Inc. Bus. Franchise Guide (CCH 14,459 (Sept. 7, 2010), the North Carolina court affirmed the trial court’s order denying the franchisor’s motion to dismiss for lack of personal jurisdiction based on the principle of apparent agency. Though court noted that the franchise agreement in that case “unequivocally defined the relationship between the franchisor and franchisee as independent”, the court reasoned that customer of the franchisee was never privy to that agreement and was thus justified in relying on the words and conduct of the franchisor and franchisee. For example, the statement on the franchisor’s website that it had just opened its fifth location in North Carolina could be construed by the customer in North Carolina to mean that the franchisee was its agent.
Clearly this issue is of utmost importance to franchisors – and, to grossly simplify, in this instance the moral of the story seems to be that “actions speak louder than words!”