Practical Considerations to Address Franchise Agency Issues
Author | Steven M. Goldman, H. Bret Lowell. |
Pages | 175-201 |
CHAPTER 4
Practical Considerations to Address
Franchise Agency Issues
Donnell J. McCormack, Jr. and Sheri A. Young
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
Protection of the System: The Balancing Act . . . . . . . . . . . . . . . . . . . . . . . . . 176
The Vicarious Liability Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Sample Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
Reasonable Reliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
Conspicuous Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
No Causal Link between Reliance and Injury . . . . . . . . . . . . . . . . . . . . . 180
Vicarious Liability in Employment Matters . . . . . . . . . . . . . . . . . . . . . . . 180
Liability for Voluntary Undertaking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
Vicarious Liability and the Americans with Disabilities Act . . . . . . . . . . 185
Practice Tips. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
The Franchise Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
Disclaim Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
Require Conspicuous Franchisee Disclosure
of Independent Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
State Only Standards or Rights the Franchisor Intends
to Enforce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
Require Indemnification from Franchisee . . . . . . . . . . . . . . . . . . . . . 189
Create an Operating Manual. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
Getting Started . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
Establishing the Basics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Developing Standards and Procedures. . . . . . . . . . . . . . . . . . . . . . . . 191
Team Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
Tips on the Creation and Organization of the Manual . . . . . . . . . . . . 194
Distribution of Operating Manual . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Updating the Manual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Examining Internal Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Assuring Franchisee’s Status as an Independent Contractor . . . . . . . 195
Public Relations Department . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Marketing Department . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
175
Providing Form Contracts as a Service to Franchisees. . . . . . . . . . . . 197
Employee Training. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
Monitoring and Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
Loss Prevention Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
Portions of this chapter are based on the article “Evolution of Vicarious Liability
as Applied to Franchise Law” authored by Sheri A. Young and Jonathan Solish
and published in the American Bar Association materials for the 1993 Forum on
Franchising.
Introduction
Franchise systems have unique value for the franchisor, the franchisee, and the
public. A franchise system enables a franchisor to increase distribution and grow
its brand more rapidly than it could through company-owned outlets. One of the
fundamental sources of value for the franchisee is the investment in a business
with a recognized name and a pretested and established product and operating
method.1For the public, the value lies in being able to readily identify and obtain
a product with a consistent character and quality.
The franchisor has the challenge of ensuring that both its franchisees and the
public receive the value expected by them. To meet this challenge, the franchisor
must establish and monitor system standards and procedures (the “operating
manual” or “manual”). While doing so, the franchisor must ensure that it protects
itself from liability under vicarious liability and similar theories. This chapter
discusses the creation and enforcement of an operating manual, the legal risks
involved, and the methods for avoiding these risks.
Protection of the System: The Balancing Act
As Chapter One illustrates, intellectual property (the trademarks, service marks,
logos and trade names, and the goodwill associated with these) is one of the two
primary elements of a franchise. The second consists of the system—the product,
along with the operating method and standards for delivering the product to the
public. A franchisor’s primary activities should be focused on defining, protect-
ing, and enhancing its intellectual property and its system. These efforts in rela-
tion to the franchisee are threefold. First, the franchisor must create an appropriate
franchise agreement. Second, the franchisor must create an appropriate operating
manual; and third, it must enforce the operating manual and otherwise act in a
manner consistent with the manual.
The franchisor’s creation of standards is not optional. The Lanham Act requires
a franchisor to protect its intellectual property through issuance of an operating
176 The Franchise Law Compliance Manual
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