Despite Successes in Fending Off Claims Based on Actual Authority, Franchisors Still Face Difficulties in Defending Claims Based on Ostensible Authority
| Publication year | 2017 |
| Author | Charles G. Miller |
Charles G. Miller
Charles G. Miller is a trial attorney, mediator, and arbitrator with Bartko, Zankel, Bunzel & Miller in San Francisco, California. He is a Certified Specialist in Franchise and Distribution Law and has served on the State Bar Business Section's Franchise Law Committee on several occasions.
The recent settlement last year of a class action against McDonald's Corp. for $3.75 million based on claims that McDonald's Corp. was liable for Labor Code violations of its franchisee brings home the dilemma that many franchise companies are facing. See, http://www.reuters.com/article/us-mcdonalds-settle-ment-idUSKBN12V1NJ, an October 31, 2016 Reuters article describing the settlement in Ochoa v. McDonald's Corp. The settlement is the culmination of a disturbing trend in franchise vicarious liability cases that has emerged in the past several years, where the courts have blindly accepted ostensible authority arguments to defeat what should have been summary judgment motions in the franchisor's favor on the issue of ostensible authority. This article briefly discusses the legal landscape and offers possible drafting solutions to the business lawyer.
In Ochoa v. McDonald's Corp.,1 the court held that the plaintiffs, employees of the franchisee suing over Labor Code violations, had raised an issue of fact as to whether the franchisee they worked for was the ostensible agent of the franchisor. "Ostensible agency exists where (1) the person dealing with the agent does so with reasonable belief in the agent's authority; (2) that belief is 'generated by some act or neglect of the principal sought to be charged,' and (3) the relying party is not negligent. Kaplan v. Coldwell Banker Residential Affiliates, Inc., 59 Cal. App. 4th 741, 747, 69 Cal. Rptr.2d 640 (1997)."2 The plaintiffs in Ochoa produced evidence that they believed they were McDonald's employees because they wore McDonald's uniforms, served McDonald's food in McDonald's packaging, received paystubs and orientation materials with McDonald's logo, and applied for their jobs through the McDonald's website. These facts could easily apply to most franchise relationships in the service industry. This was enough of a showing to defeat summary judgment based on cases like Kaplan v. Coldwell Banker, where summary judgment was denied on the basis of Coldwell Banker's "we are one big family" form of advertising. In Kaplan, the plaintiff, a...
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