An international model for vicarious liability in franchising.

Author:Emerson, Robert W.
 
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Abstract

Vicarious liability in the franchising context is a fundamental issue, both in the United States and foreign jurisdictions. With no all-encompassing, clear precedent in the United States, other nations' approaches may provide lessons for American lawmakers and the U.S. franchising community. Together, the division between jurisdictions and the absence of uniform standards for imposing vicarious liability on franchisors demonstrate the need for more comprehensible and predictable case law. This need can be met through an examination of European regulations, model laws, and guidelines, as well as the laws in a number of nations worldwide, which indicate a pathway to better franchise agreements and possible governmental mandates (e.g., prominent, required notices about a franchise's business ownership). Franchisors would have in hand the means to determine their risks and plan their behavior, even accounting for the more effective approaches to franchisor vicarious liability that are sometimes found elsewhere in the global franchising community.

Table of Contents I. INTRODUCTION II. THE CURRENT STATE OF VICARIOUS LIABILITY IN THE UNITED STATES III. INTERNATIONAL APPROACHES TO VICARIOUS LIABILITY A. Contributions to Franchise Law: Multinational Approaches 1. Rome I Regulations and Conflict of Laws 2. UNIDROIT's Contribution to International Franchise Law and Vicarious Liability Concepts B. Model Nations 1. The European Union 2. France 3. Italy 4. Germany 5. China 6. Australia and New Zealand IV. CONCLUSION I. INTRODUCTION

Franchising is one of the most popular methods for running and expanding a business. In the United States, there are approximately 760,000 operating franchised units, (1) accounting for one-third of all retail sales, (2) over 8.2 million directly employed persons, (3) another 10 million indirectly related jobs, (4) and over $2 trillion in annual retail sales. (5) Furthermore, the American concept of franchising is expanding rapidly throughout the world, accounting for an ever-growing share of international commerce. (6) Collectively, these businesses have accrued hundreds of billions of dollars in annual sales. (7) This trend towards franchising means that the need for regulations in the franchise sphere is more important than ever. In response, more and more governments have decided to police those who choose to franchise with franchise-specific legislation; such legislation has already been integrated into over thirty nations' legal regimes. (8) This worldwide rise in domestic regulation will no doubt continue.

Overall, worldwide franchising, even more so than franchising in the United States, has experienced a high rate of growth in recent years. (9) As an example, Germany, a country where the first McDonald's opened in 1971, (10) saw a 50.79 percent increase in franchisors, an 83.87 percent increase in franchisees, and a 40.62 percent growth in franchises from 1998 to 2008. (11) Similarly, China, a country that only recently opened its doors to the global market, has enjoyed steady growth in franchising, reaching over 1 million franchise shops by 2011. (12)

As franchises have increased in international popularity, crucial legal issues have emerged concerning basic jurisdictional matters, such as conflicts of law, fundamental contract interpretation disputes--or even exclusion of clauses in the franchise agreement--and the franchisor's potential vicarious liability for its franchisee's tortious actions. The contract and tort issues arise, in part, from a tenet of franchise ownership and management: franchisees are not completely free to run the business as they see fit. Besides government regulation of businesses generally, the franchisee is subject to the rules imposed by the franchisor in the parties' agreement or in ancillary documents (e.g., the operations manual). (13)

This Article concerns vicarious liability in the franchising context, as addressed in a number of foreign jurisdictions. As there is a lack of clear precedent in the United States, these foreign approaches may provide lessons for American lawmakers and the U.S. franchising community. (14) The lack of uniform standards for imposing vicarious liability on franchisors has undermined the ability of parties to a franchise agreement to evaluate the risks of entering into the relationship and better plan their subsequent behavior. This demonstrates the need for more understandable and predictable case law.

This Article also analyzes the variance in the national franchise legislation of foreign countries. Typically, courts in these various nations will analyze a franchisor's potential vicarious liability based on domestic legal systems. (15) For example, in civil law countries, such as France and Italy, the analysis relies heavily on the consumer's reasonable expectation as to the ownership and control of the franchise. (16) In contrast, in common law countries, such as the United States and Australia, the analysis turns on the extent of the control that a franchisor has over its franchisees. (17) Despite the lack of uniform standards in both U.S. and international franchising communities, vicarious liability in general has three core requirements: First, there must be a legally sufficient relationship existing between the person causing the plaintiffs injury and the vicariously liable defendant. (18) Second, the person must act wrongfully in causing the plaintiffs injury. (19) Third, the tortious act must have occurred within the scope of the relationship between the tortfeasor and the vicariously liable defendant. (20) The first core element of vicarious liability, the legally sufficient relationship, has been the source of much of the confusion in establishing a consistent blueprint in franchising law. Courts in countries that follow common law traditions have a problem defining the level of control needed to establish a relationship's legal sufficiency. This Article examines franchisor vicarious liability in several foreign jurisdictions in an attempt to reduce the confusion surrounding franchisor vicarious liability in the United States.

  1. THE CURRENT STATE OF VICARIOUS LIABILITY IN THE UNITED STATES

    In the United States, the legally sufficient relationship requirement can be met either by establishing the presence of an actual, sufficient relationship (i.e., an actual agency relationship) or by satisfying one of the exceptions to the relationship requirement (e.g., the apparent agency exception, which is the most important exception in determining franchisor vicarious liability). (21) Thus, courts have identified two basic agency law theories for holding a franchisor vicariously liable: establishing either the actual or the apparent authority of the franchisee to render its franchisor liable for its conduct. (22) These concepts are based on traditional common law and have been applied to tort, statutory, and contract claims, as well as to the franchise relationship. (23)

    A franchisor "may be held liable for acts of his franchisee when the actual relationship between them is that of principal and agent or master and servant." (24) Through this actual agency principle, a franchisor, like any other principal, is responsible for the acts or omissions of a franchisee that is, in fact, operating as the franchisor's agent. (25) The traditional approach for determining whether an economic relationship will be legally sufficient to support this application of vicarious liability is the control test, (26) which derives from the language of the Restatement (Second) of Agency: a servant is one "who with respect to the physical conduct in the performance of the services is subject to the other's control or right to control." (27) There are ten factors considered when applying the control test. (28) While most franchise agreements explicitly assert that the parties are independent contractors and disclaim any agency relationship, (29) the terms of "the contract will not be dispositive and the courts will review the true nature of the relationship in making its decision." (30) The courts will typically consider operations manuals and the underlying circumstances in assessing whether an actual agency relationship exists. (31)

    In taking this holistic approach to actual agency, courts commonly require that the control of the franchisor relate to the day-to-day operations of the franchisee in order to establish vicarious liability. (32) Courts additionally distinguish control intended primarily to ensure the "uniformity and the standardization of products and services" of the franchisee from control over the "actual day-to-day work"--the majority of courts adopt this "daily operations" control test. (33) Moreover, many of these courts have required not only that the franchisor's control encompass day-to-day operations but also that the franchisor's control extend to the instrumentality for the injury at issue. (34)

    A recent case exemplifying this approach is Patterson v. Domino's Pizza, LLC, (35) in which a franchisee's employee claimed that she was sexually harassed by a coworker, and that both she and the harasser were actually employees of Domino's, the franchisor. In a four-to-three holding that relied heavily on the terms of the franchise agreement, the California Supreme Court reinstated summary judgment for Domino's. The court declared that "[a] franchisor will be liable if it has retained or assumed the right of general control over the relevant day-to-day operations at its franchised locations ... and cannot escape liability in such a case merely because it failed or declined to establish a policy with regard to that particular conduct." (36) Rejecting the appeals court's more expansive interpretation of vicarious liability, the California Supreme Court stated that the "imposition and enforcement of a uniform marketing and operational plan cannot automatically saddle the franchisor with responsibility for...

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