Vicarious liability of franchisors limited

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“The fact remains that DRI, and not Arby’s, had the discretion to set the terms and conditions of employment. Therefore, the operational standards are not a sufficient basis for imposing vicarious liability on Arby’s for DRI’s negligence.” Hon. Charles P. Dykman Wisconsin Court of Appeals

A franchisor is not vicariously liable for the negligence of a franchisee, unless it has actual control over the activities which give rise to the negligence claim, the Wisconsin Court of Appeals held on Oct. 9.

Arby’s, Inc., is a national franchisor of fastfood restaurants. Dennis Rasmussen, Inc. (DRI), is one of Arby’s franchisees. Under the terms of the franchise agreement executed by Arby’s and DRI, DRI must follow Arby’s specifications for food service, cleanliness, signage, suppliers, building construction and remodeling, among other things.

In addition, the license agreement required DRI to comply at all times with all applicable laws, ordinances and regulations, and the manager of the restaurant must have completed an Arby’s Restaurant Management Training Seminar.

DRI hired Cathy Propp as general manager for its restaurant in 1994. Although Propp managed another Arby’s at that time, she had not completed Arby’s management training program. In early 1999 she hired Harvey Pierce, a Dane County Jail inmate with Huber law work release privileges.

At the time she hired him, Propp believed that Pierce had been convicted of some form of battery, but in fact, his conviction was for second-degree sexual assault.

During the five months that Pierce worked at the restaurant, he was frequently verbally abusive to other employees, and on numerous occasions acted in an offensive and hostile manner.

Despite several complaints from coworkers, Propp never disciplined Pierce. Nor did she take any action when another employee informed her that he had sold Pierce a weapon.

On June 11, 1999, Pierce was scheduled to work from 3:00 p.m. to 10:00 p.m. At 3:51 p.m. he punched out without permission. The shift manager called Propp to tell her that Pierce had left work.

Pierce then walked from Arby’s to a WalMart parking lot approximately one-half mile away, where he shot Robin Kerl (his exgirlfriend), David Jones (Kerl’s fiance), and then himself. Jones and Pierce died, but Kerl survived, although she sustained serious injuries and is permanently disabled.

Kerl and Jones brought suit against DRI and Arby’s, alleging negligent supervision, negligent hiring, negligent retention, nuisance, and breach of third-party beneficiary contract, seeking both compensatory and punitive damages.

The plaintiffs alleged that Arby’s was vicariously liable for DRI’s negligent supervision and negligent hiring under theories of actual or constructive agency, respondeat superior and/or active negligence. They claimed that Arby’s negligently failed to train and supervise management at the Arby’s franchise where Pierce was employed.

Arby’s moved for summary judgment seeking dismissal of all claims, and Dane County Circuit Court Judge Richard J. Callaway granted the motion. The plaintiffs appealed, but the court of appeals affirmed in a decision written by Judge Charles P. Dykman and joined by Judge David G. Deininger. Judge Paul G. Lundsten wrote a concurring opinion.

First Impression

The court held that Arby’s was not vicariously liable for any negligence of DRI.

The plaintiffs claimed that DRI was negligent with respect to restaurant management, personnel policies and practices, and compliance with Huber law rules and regulations.

No published Wisconsin state court decision has previously addressed the issue of vicarious liability in the context of a franchise relationship, but a federal Wisconsin court decision does, Raasch v. Dulany, 273 F.Supp. 1015 (E.D.Wis.1967).

The franchisor in Raasch was Avis. An employee of one of its rental car franchises negligently caused an automobile accident. The court analyzed the case using agency law principles, and denied Avis’ motion for summary judgment.

The federal court concluded that Avis had “control or a right of control” over the way the franchisee does business, and therefore, was vicariously liable.

The court of appeals rejected that standard, however, noting it was contrary to the great weight of authority in other jurisdictions, many of which the court cited.

In particular, the court cited Hoffnagle v. McDonald’s Corp., 522 N.W.2d 808 (Iowa 1994), where the court held that a franchisor was not liable when a franchisee’s employee was assaulted by third parties. Although the franchisee had to follow McDonald’s business manuals, guidelines and product and service specifications, the court held that McDonald’s did not retain sufficient control to owe a duty of security to the franchisee’s employee.

The Iowa Supreme Court found that it was the franchisee who had the power to hire, fire, supervise and discipline the franchisee’s employees, and therefore, McDonald’s lacked sufficient control of day-to-day operations for vicarious liability to attach.

The court of appeals found the reasoning of the Iowa court and other jurisdictions persuasive and adopted control over daily operations of the franchisee as the decisive factor in determining whether a franchisor can be held vicariously liable.

The court distinguished an Oregon case, Miller v. McDonald’s Corp., 945 P.2d 1107 (Or.Ct.App.1997), in which the court held that the franchisor could be found vicariously liable after a customer bit into a sapphire stone in her Big Mac.

Distinguishing Miller, the court of appeals stated, “the injury bore a direct relationship to how McDonald’s instructed its franchisee to prepare food, and McDonald’s regularly inspected the restaurant to ensure compliance with its product standards. Vicarious liability did not result from a general right of control but because ‘there is evidence that [McDonald’s] had the right to control [its franchisee] in the precise part of its business that allegedly resulted in plaintiff’s injuries.’”

Application

Applying that standard, the court found Arby’s did not exercise such control.

The franchise agreement required that at least one full-time manager satisfactorily complete Arby’s management training program, and gave Arby’s the right to inspect the premises “at all reasonable times.”

However, Arby’s remedy, should the franchisee fail to comply with the agreement, is to give notice to cure the failure within 30 days, and even then, its only remedy was to terminate the agreement.

The court stated, “The agreement expressly assigns responsibility for employees to DRI, who ‘shall hire, train, maintain and properly supervise sufficient, qualified and courteous personnel.’ Plaintiffs contend that this provision gives Arby’s ‘the right to control personnel issues when those issues caused a problem with the operation of the restaurant or the quality of the product.’ But under Article 13, Arby’s remedy for DRI’s failure to comply with the agreement and/or OSM standards is limited to giving DRI 30 days to cure the problem and then terminating the franchise agreement if DRI does not rectify the situation within the deadline. Nothing in the agreement gives Arby’s the right to directly supervise how DRI handles personnel issues.”

The court found that while the agreement contains “helpful hints,” “guidelines,” and “words of advice” for employee issues, nothing gives Arby’s the right to intervene in employee management.

“[T]he fact remains that DRI, and not Arby’s, had the discretion to set the terms and conditions of employment,” the court concluded. “Therefore, the operational standards in the OSM are not a sufficient basis for imposing vicarious liability on Arby’s for DRI’s negligence.”

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Accordingly, the court affirmed.

The Concurrence

Judge Lundsten wrote separately, finding, “In this case, Arby’s did not even arguably have control over the DRI acts or omissions which plaintiffs contend were negligent. … Accordingly, I think it is a simple matter to conclude that Arby’s had no liability in this case.”

Questioning the standard adopted by the majority opinion, Lundsten wrote, “If a franchisor exerts actual control over alleged negligent activity, it hardly seems necessary to apply a vicarious theory of liability. That leaves ‘a right of control … over the alleged negligent activity.’ Majority at par. 30. How does this apply in practice? For example, is a franchisor vicariously liable for a death resulting from food poisoning caused by a franchisee’s failure to follow detailed cleanliness criteria imposed by the franchisor where the franchisor has the right to inspect to determine compliance and, if the criteria are not met, terminate the contract? Perhaps not, because the majority cites with approval cases that have declined to impose liability on a franchisor because the franchisor had a right to inspect, enforce standards, and terminate for noncompliance. Majority at par. 15. So what does that leave?”

Lundsten added, “Apart from apparent agency cases (a theory that has no application here), when would a franchisor be vicariously liable for the negligent acts of a franchisee? This is not a question we need answer in this case because it can be decided on narrower grounds. What I find perplexing is that the majority does not rest its decision on narrower grounds and leave for another day an attempt at articulating a workable standard by which franchisors may be held vicariously liable for the acts of franchisees.”

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David Ziemer can be reached by email.