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