Control or No Control — That is the Question
As a long history of case law demonstrates, franchisors face the daunting task of walking a liability tightrope between retaining "too much" or "too little" control over their franchisees' operations. Indeed, among the most sophisticated franchisors, the "c-word," control, is not spoken and the tightrope walked is an exercise in how rigorously certain operational standards can be set and enforced to reduce known risks. Because vicarious liability is a fact-driven analysis that is determined by a retrospective look at how a franchisor has walked or straddled this liability tightrope, every franchisor should carefully reconsider whether its approach to control, particularly in the case of critical system standards, is appropriate in today's liability-threatened world.
In evaluating an appropriate approach to system standards, it is critically important to recognize the realities of a global economy, and in particular, the brand and business momentum risks which exist in the modern market place. See, for example, The Wall Street Journal report dated June 29, 1999 on how the world's most famous brand, Coca-Cola, blundered in a European product recall - according to the WSJ, "PR flubs only made things worse." If it can happen to Coca-Cola, it can happen certainly to franchisors less prepared to deal with a standards breakdown.
Even if a standards breakdown results in only unnecessary brand damage, with no personal injury to consumers, the proliferation of television news magazines guarantees that such brand damage will be disseminated around the clock and the globe. More ominously, a standards breakdown may result in a widespread perception that a franchisor's operations standards (or lack thereof) have caused injury to formerly loyal, brand customers.
In a tort context, it is axiomatic that "risk imports relation" - that is, the greater and better known the risk of a particular injury, the higher the duty to avoid the risk. Given life on the information superhighway, where voluminous information on virtually any subject is available instantaneously, ignorance of risk has little utility as a legal defense and may be more damaging to brand equity than owning up to the risk. If there is information available on a risk, the public's perception will be that the franchisor should have known about the risk. If the franchisor did not know about the risk, then the franchisor will look either inept or indifferent. Moreover, even if the franchisor's interests are litigated successfully after the fact, litigation results rarely, if ever, come close to erasing the lost revenues and profits, brand damage, and negative publicity that occurs in connection with a serious standards breakdown.
In evaluating what is an appropriate standards balance, it is also important to appreciate the reality of modern litigation, and in particular, what liability-related risks exist in today's economy. While each franchisor is unique and must develop and implement policies that make sense for its particular industry, franchisors and their franchisees face an increasingly complex web of applicable federal, state and local laws, rules and regulations. At the same time, however, a franchisor simply cannot monitor a franchisee's daily compliance with all applicable laws, rules and regulations, despite a franchise agreement provision requiring such compliance by a franchisee. However, by adopting system standards which deal effectively with the greatest and best known risks in a franchise business, a franchisor can create some level of insulation from liability for the actions of its franchisees.
The reality of modern litigation is that a customer who suffers an injury in a franchise outlet will likely assign blame to the insured outlet rather than to himself. Further, the injured customer will generally make no distinction between franchisee and franchisor conduct in connection with how the injury actually occurred; the customer's (and its counsel's) only interest is to line up the "deep pockets" of the most well-heeled, or most highly insured, target for liability.
There are various theories, including direct liability and agency, under which an injured customer may seek to hold a franchisor liable for injuries caused allegedly by unsafe goods or services. Some of these theories seek to hold the franchisor "directly" liable. These theories include strict liability, breach of warranty and negligent selection, production or supervision. Other theories seek to hold a franchisor "indirectly" or "vicariously" liable. Such "indirect" liability theories typically involve agency laws.
With respect to direct liability, a consumer may claim that a franchisor negligently produced, specified or selected a food product or service requirement. Direct liability often is predicated on the theory that a franchisor who retains control over the products to be used or services to be furnished in a business has a duty to exercise such control with due care. Most recently, in Read v. The Scott Fetzer Company, 990 S.W.2d 732, 42 Tex. Sup. Ct. 732 (1998) (the "Kirby" vacuum cleaner case), a manufacturer which sold its products through prescribed in-home demonstrations was held liable vicariously for a criminal assault perpetrated by a distributor's independent contractor-dealer on a customer in her home despite an express contractual provision in the contract between the manufacturer and the distributor making the selection and conduct of the contract dealers the sole and exclusive responsibility of the distributor. According to the "Kirby" court, the manufacturing company had maintained control over its distributors and their dealers by requiring in-home sales demonstrations and, therefore, had a duty to exercise its retained control reasonably by prescribing background checks for the distributors' prospective contract dealers.
Franchisors also have been held vicariously liable for the acts of another person under the theory that the wrongdoer is the "agent" of the franchisor. Courts routinely use the general term "agent" to describe a relationship that gives rise to vicarious liability. Although presented in a variety of different ways, most jurisdictions recognize the same key factor in determining whether a franchisee is a franchisor's actual agent -- i.e., the right to control not only the results of the work, but also the means and manner in which the franchisee's operation is executed. See Drexel v. Union Prescription Centers, Inc., 582 F.2d 781 (3d Cir. 1978) (applying Pennsylvania law).
Beyond actual damages based on direct and indirect liability theories, punitive damages allow a consumer to claim that not only did a company's product or service cause injury, but also that the company was reckless and therefore, should have to pay a penalty. By design, the amount of the penalty will be established at a level that causes the company to pause and to reflect on its conduct.
Trial lawyers pursue punitive damages through the invasive and expensive pre-trial discovery process. An injured consumer's trial lawyers will attempt to use the information gathered during discovery to convince a jury of lay persons that the franchisor is a bad actor and deserves to be punished. As abundantly evidenced by the recent run-away $4.9 billion jury verdict against General Motors, the jury will have, most likely, a collective expectation that all branded goods and services sold in the market place should be safe and, when they are not, that someone should pay for the resulting consumer injuries.
Given the legal and business dynamics of the modern market place, each franchisor has a stark, and fundamental choice: either to be reactive to litigation and global negative media publicity if and when it strikes, or to be proactive to reduce and manage potential risks by "controlling" them through system standards. From the authors' perspective, identifying the situations and the procedures that are most likely to cause injuries, and building procedures to eliminate or reduce identified risks, has greater utility than spending resources defending against otherwise avoidable litigation and bad press. See McDonald's Corporation v. Roger Robertson and Marilyn Robertson, Case No. 97-1189-Civ-J-10C (M.D. Fla.) (holding that a food franchisor has a clear interest in securing uniform product and service of high quality at all of its locations, and a clear legal interest in avoiding disputes about cleanliness and safety of products bearing its proprietary marks), aff'd 147 F.3d 1301 (11th Cir. 1998).
Accordingly, today's approach to system standards should be predicated upon identifying and establishing a hierarchy of risks to public safety and the integrity of a system's branded products and services. The more real and serious those risks are to the public and brand equity, the greater should be the franchisor's efforts to eliminate and reduce those risks. The franchisor should seek to "control" (or, from a more liability sensitive perspective, "monitor") such risks through the implementation and enforcement of system standards. Central to this effort should be a well-established (and sometimes, more importantly, a well-documented) plan to systematically communicate and document the risks to the franchisee community along with a clear statement of what has been done and what remains to be done to eliminate the identified risks. While there is a cost (and, from a vicarious liability perspective, a risk) for being well-informed and proactive, juries rarely reward mediocrity and frequently punish perceived indifference.
For franchisors, maintaining the consistent quality and integrity of their system's branded goods and services is vital to enjoying continued success in a global economy. Failure to ensure the consistent quality and integrity of goods and services delivered to the public under registered proprietary marks may result not only in lawsuits, but also in potentially far more devastating global negative publicity and brand erosion. Moreover, the best legal defense to future injury claims is to make a true, proactive commitment to developing and to enforcing state-of-the-art system standards. A jury and the consuming public is much more likely to be forgiving of someone who has tried and has failed than of someone who has indifferently ignored discoverable (or, worse yet, discovered) risks.
In evaluating an appropriate approach to system standards, it is critically important to recognize the realities of a global economy, and in particular, the brand and business momentum risks which exist in the modern market place. See, for example, The Wall Street Journal report dated June 29, 1999 on how the world's most famous brand, Coca-Cola, blundered in a European product recall - according to the WSJ, "PR flubs only made things worse." If it can happen to Coca-Cola, it can happen certainly to franchisors less prepared to deal with a standards breakdown.
Even if a standards breakdown results in only unnecessary brand damage, with no personal injury to consumers, the proliferation of television news magazines guarantees that such brand damage will be disseminated around the clock and the globe. More ominously, a standards breakdown may result in a widespread perception that a franchisor's operations standards (or lack thereof) have caused injury to formerly loyal, brand customers.
In a tort context, it is axiomatic that "risk imports relation" - that is, the greater and better known the risk of a particular injury, the higher the duty to avoid the risk. Given life on the information superhighway, where voluminous information on virtually any subject is available instantaneously, ignorance of risk has little utility as a legal defense and may be more damaging to brand equity than owning up to the risk. If there is information available on a risk, the public's perception will be that the franchisor should have known about the risk. If the franchisor did not know about the risk, then the franchisor will look either inept or indifferent. Moreover, even if the franchisor's interests are litigated successfully after the fact, litigation results rarely, if ever, come close to erasing the lost revenues and profits, brand damage, and negative publicity that occurs in connection with a serious standards breakdown.
In evaluating what is an appropriate standards balance, it is also important to appreciate the reality of modern litigation, and in particular, what liability-related risks exist in today's economy. While each franchisor is unique and must develop and implement policies that make sense for its particular industry, franchisors and their franchisees face an increasingly complex web of applicable federal, state and local laws, rules and regulations. At the same time, however, a franchisor simply cannot monitor a franchisee's daily compliance with all applicable laws, rules and regulations, despite a franchise agreement provision requiring such compliance by a franchisee. However, by adopting system standards which deal effectively with the greatest and best known risks in a franchise business, a franchisor can create some level of insulation from liability for the actions of its franchisees.
The reality of modern litigation is that a customer who suffers an injury in a franchise outlet will likely assign blame to the insured outlet rather than to himself. Further, the injured customer will generally make no distinction between franchisee and franchisor conduct in connection with how the injury actually occurred; the customer's (and its counsel's) only interest is to line up the "deep pockets" of the most well-heeled, or most highly insured, target for liability.
There are various theories, including direct liability and agency, under which an injured customer may seek to hold a franchisor liable for injuries caused allegedly by unsafe goods or services. Some of these theories seek to hold the franchisor "directly" liable. These theories include strict liability, breach of warranty and negligent selection, production or supervision. Other theories seek to hold a franchisor "indirectly" or "vicariously" liable. Such "indirect" liability theories typically involve agency laws.
With respect to direct liability, a consumer may claim that a franchisor negligently produced, specified or selected a food product or service requirement. Direct liability often is predicated on the theory that a franchisor who retains control over the products to be used or services to be furnished in a business has a duty to exercise such control with due care. Most recently, in Read v. The Scott Fetzer Company, 990 S.W.2d 732, 42 Tex. Sup. Ct. 732 (1998) (the "Kirby" vacuum cleaner case), a manufacturer which sold its products through prescribed in-home demonstrations was held liable vicariously for a criminal assault perpetrated by a distributor's independent contractor-dealer on a customer in her home despite an express contractual provision in the contract between the manufacturer and the distributor making the selection and conduct of the contract dealers the sole and exclusive responsibility of the distributor. According to the "Kirby" court, the manufacturing company had maintained control over its distributors and their dealers by requiring in-home sales demonstrations and, therefore, had a duty to exercise its retained control reasonably by prescribing background checks for the distributors' prospective contract dealers.
Franchisors also have been held vicariously liable for the acts of another person under the theory that the wrongdoer is the "agent" of the franchisor. Courts routinely use the general term "agent" to describe a relationship that gives rise to vicarious liability. Although presented in a variety of different ways, most jurisdictions recognize the same key factor in determining whether a franchisee is a franchisor's actual agent -- i.e., the right to control not only the results of the work, but also the means and manner in which the franchisee's operation is executed. See Drexel v. Union Prescription Centers, Inc., 582 F.2d 781 (3d Cir. 1978) (applying Pennsylvania law).
Beyond actual damages based on direct and indirect liability theories, punitive damages allow a consumer to claim that not only did a company's product or service cause injury, but also that the company was reckless and therefore, should have to pay a penalty. By design, the amount of the penalty will be established at a level that causes the company to pause and to reflect on its conduct.
Trial lawyers pursue punitive damages through the invasive and expensive pre-trial discovery process. An injured consumer's trial lawyers will attempt to use the information gathered during discovery to convince a jury of lay persons that the franchisor is a bad actor and deserves to be punished. As abundantly evidenced by the recent run-away $4.9 billion jury verdict against General Motors, the jury will have, most likely, a collective expectation that all branded goods and services sold in the market place should be safe and, when they are not, that someone should pay for the resulting consumer injuries.
Given the legal and business dynamics of the modern market place, each franchisor has a stark, and fundamental choice: either to be reactive to litigation and global negative media publicity if and when it strikes, or to be proactive to reduce and manage potential risks by "controlling" them through system standards. From the authors' perspective, identifying the situations and the procedures that are most likely to cause injuries, and building procedures to eliminate or reduce identified risks, has greater utility than spending resources defending against otherwise avoidable litigation and bad press. See McDonald's Corporation v. Roger Robertson and Marilyn Robertson, Case No. 97-1189-Civ-J-10C (M.D. Fla.) (holding that a food franchisor has a clear interest in securing uniform product and service of high quality at all of its locations, and a clear legal interest in avoiding disputes about cleanliness and safety of products bearing its proprietary marks), aff'd 147 F.3d 1301 (11th Cir. 1998).
Accordingly, today's approach to system standards should be predicated upon identifying and establishing a hierarchy of risks to public safety and the integrity of a system's branded products and services. The more real and serious those risks are to the public and brand equity, the greater should be the franchisor's efforts to eliminate and reduce those risks. The franchisor should seek to "control" (or, from a more liability sensitive perspective, "monitor") such risks through the implementation and enforcement of system standards. Central to this effort should be a well-established (and sometimes, more importantly, a well-documented) plan to systematically communicate and document the risks to the franchisee community along with a clear statement of what has been done and what remains to be done to eliminate the identified risks. While there is a cost (and, from a vicarious liability perspective, a risk) for being well-informed and proactive, juries rarely reward mediocrity and frequently punish perceived indifference.
For franchisors, maintaining the consistent quality and integrity of their system's branded goods and services is vital to enjoying continued success in a global economy. Failure to ensure the consistent quality and integrity of goods and services delivered to the public under registered proprietary marks may result not only in lawsuits, but also in potentially far more devastating global negative publicity and brand erosion. Moreover, the best legal defense to future injury claims is to make a true, proactive commitment to developing and to enforcing state-of-the-art system standards. A jury and the consuming public is much more likely to be forgiving of someone who has tried and has failed than of someone who has indifferently ignored discoverable (or, worse yet, discovered) risks.
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