The franchise industry is deep in renewal season and one recent California case reminds us that franchise systems, especially those with company owned outlets, must always require franchisees to clearly identify themselves as independently owned businesses. If your system’s franchise agreement does not REQUIRE all franchisees have signs indicating that the franchise is independently owned and operated then you should revise it now.

In the case of Ford v. Palmden Restaurants, LLC, a California Appellate Court held that Denny’s Restaurants and its affiliates, could be held liable under an "ostensible agency" theory for injuries sustained by a customer at a franchisee’s Palms Springs restaurant. The customer sued the franchisee and Denny’s as well as all of Denny’s affiliates after he was beat up by members of a gang who consistently "took over" the restaurant every Saturday night.

Under California law, a defendant can be held liable under an ostensible agency theory when the defendant intentionally or negligently causes a third party to incorrectly believe someone is an agent. The California court described 3 cases where a franchisor was found liable for the franchisee under this theory and found similar facts existed with Denny’s case. First, the Denny’s franchise system utilized both franchisee operated and company owned outlets and it was not common knowledge among the population that all Denny’s are franchisees. Second, the franchisee did not display any signage or provide any other notice that the restaurant was operated by a franchisee.

The signage issue was not dispositive in this case but it is important to note that the Denny’s franchise agreement did not require the franchisee indicate that it was independently owned and operated. While not a fail safe remedy to avoid liability under an ostensible agency theory, it would certainly lend support for any defense.