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Franchisor not vicariously liable for negligence

Sykes

“The quality and operational standards typically found in franchise agreements do not establish the sort of close supervisory control or right to control necessary to support imposing vicarious liability on a franchisor.”

Hon. Diane S. Sykes
Wisconsin Supreme Court

The Wisconsin Supreme Court held on June 29 that a franchisor may be held vicariously liable for the tortious conduct of a franchisee only if the franchisor has control or a right of control over the daily operation of the specific aspect of the franchisee’s business that is alleged to have caused the harm.

Arby’s, Inc., is a national franchisor of fast-food restaurants. Dennis Rasmussen, Inc. (DRI) operates an Arby’s restaurant in Madison as a franchisee. The relationship between Arby’s and DRI is governed by a licensing agreement pursuant to which DRI is authorized to use Arby’s trade name in the operation of a restaurant franchise.

The agreement contains specific requirements governing, among other things, building design, construction, and remodeling; purchasing; food service and packaging; signage and advertising. The agreement also requires DRI to carry at least $1 million of liability insurance naming Arby’s as an additional insured.

Article 6 of the license agreement addresses the issue of personnel. As to management personnel, the agreement requires a designated officer or shareholder of the licensee to attend an Arby’s management training seminar. As to personnel generally, the agreement provides: “LICENSEE shall hire, train, maintain and properly supervise sufficient, qualified and courteous personnel for the efficient operations of the Licensed Business.”

In 1999, DRI hired Harvey Pierce to work at its restaurant. At the time, Pierce was a work-release inmate at the Dane County Jail. In the mid-afternoon of June 11, 1999, Pierce walked off the job without permission. He then crossed the street to the Wal-Mart store parking lot, where he lay in wait for Robin Kerl, his former girlfriend, and David Jones, her fiancé, both Wal-Mart employees.

When Kerl and Jones emerged from the building, Pierce shot them both in the head. He then shot himself. Jones and Pierce died of their injuries. Kerl survived but sustained serious injuries and is permanently disabled.

Kerl and Jones’ estate sued Arby’s and DRI, among others. The complaint alleged several causes of action against DRI, and alleged that Arby’s was liable under theories of “actual or constructive agency,” respondeat superior and/or “active negligence.”

Arby’s and DRI moved for summary judgment. Dane County Circuit Court Judge Richard J. Callaway, granted summary judgment, dismissing all claims against Arby’s and dismissing some of the claims against DRI.

Only the dismissal of the claims against Arby’s was appealed, but the court of appeals affirmed in a published opinion, Kerl v. Rasmussen, 2003 WI App 226, 267 Wis. 2d 827, 672 N.W.2d 71.

The Supreme Court granted review, but also affirmed, in a unanimous decision by Justice Diane S. Sykes. Justice Jon P. Wilcox did not participate.

Vicarious Liability

After extensively reviewing the histories of both vicarious liability theories, and franchising as a business model, the court concluded, “the premises of vicarious liability weaken when applied to a claim that a franchisor should be held strictly liable for the torts of its franchisee. The ‘control’ of a franchisor does not consist of routine, daily supervision and management of the franchisee’s business, but, rather, is contained in contractual quality and operational requirements necessary to the integrity of the franchisor’s trade or service mark. The perceived fairness of requiring a principal who closely controls the physical conduct of an agent to answer for the harm caused by the agent is diminished in this context.”

What the court held

Case: Kerl v. Dennis Rasmussen, Inc., No. 02-1273.

Issue: Is a franchisor liable for the negligent hiring of an employee by a franchisee?

Holding: No. A franchisor is vicariously liable for the tortious conduct of a franchisee only if the franchisor has control or a right of control over the daily operation of the specific aspect of the franchisee’s business that is alleged to have caused the harm.

Counsel: Daniel W. Hildebrand, Madison; Douglas B. Keberle, West Bend; Donald J. Murphy, Monona, for appellant; Emile H. Banks, Jr., Vicki L. Arrowood, Milwaukee, for respondent.

The court added, “Similarly, while the rationale of encouraging safety and the exercise of due care is present in the domain of franchising, as elsewhere, it has less strength as a justification for imposing no-fault liability on a franchisor. The typical franchisee is an independent business or entrepreneur, often distant from the franchisor and not subject to day-to-day managerial supervision by the franchisor. The imposition of vicarious liability has less effectiveness as an incentive for enhancing safety and the exercise of care in the absence of the sort of daily managerial supervision and control of the franchise that could actually bring about improvements in safety and the exercise of care.”

Persuasive Authority

The court then noted that the trend i
n other jurisdictions has been to severely limit vicarious liability of franchisors, because the quality and operational standards and inspection rights contained in a franchise agreement do not establish a franchisor’s control or right of control over the franchisee sufficient to ground a claim for vicarious liability as a general matter or for all purposes.

The court contrasted numerous recent decisions holding franchisors not vicariously liable for assorted torts, with numerous older cases finding liability, but dating from the 1960s and 1970s.

Summarizing the holdings of the recent cases, the court found, “These courts have adapted the traditional master/servant ‘control or right to control’ test to the franchise context by narrowing its focus: the franchisor must control or have the right to control the daily conduct or operation of the particular ‘instrumentality’ or aspect of the franchisee’s business that is alleged to have caused the harm before vicarious liability may be imposed on the franchisor for the franchisee’s tortious conduct. The quality and operational standards typically found in franchise agreements do not establish the sort of close supervisory control or right to control necessary to support imposing vicarious liability on a franchisor for the torts of the franchisee for all or general purposes.”

The court acknowledged one recent case which does not follow the modern trend of nonliability — Miller v. McDonald’s Corp., 945 P.2d 1107 (Or. Ct. App. 1997). In Miller, the Oregon Supreme Court held that McDonald’s could be held vicariously liable to a plaintiff who was injured when she bit into a sapphire stone while eating a Big Mac sandwich.

The Oregon court based its decision on the fact that the franchise agreement and an operations manual incorporated into the agreement, “precise methods” of food handling and preparation. Because the plaintiff alleged that the franchisee’s “deficiencies in those functions resulted in the sapphire being in the Big Mac,” the court concluded that there was an issue of fact for trial on whether the franchisor had the right to control the franchisee “in the precise part of its business that allegedly resulted in plaintiff’s injuries.”

Discussing Miller, the Wisconsin Supreme Court observed that it “appears to run contrary to the prevailing rule that quality and operational standards contained in a franchise agreement are generally insufficient to support franchisor vicarious liability.”

Although the result is contrary to modern trends, the court also found that the legal rule the Oregon court purported to follow was nevertheless consistent with the current consensus to the extent that it focused on the particular aspect of the franchisee’s business that was alleged to have caused the harm.

Consistent with the modern trend, the court stated, “We conclude that the standardized provisions commonly included in franchise agreements specifying uniform quality, marketing, and operational requirements and a right of inspection do not establish a franchisor’s control or right to control the daily operations of the franchisee sufficient to give rise to vicarious liability for all purposes or as a general matter. We hold that a franchisor may be held vicariously liable for the tortious conduct of its franchisee only if the franchisor has control or a right of control over the daily operation of the specific aspect of the franchisee’s business that is alleged to have caused the harm.”

Application

Applying that rule, the court concluded that Arby’s did not have control or the right to control the day-to-day operation of the specific aspect of DRI’s business that is alleged to have caused the plaintiffs’ harm — supervision of its employees.

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Case Analysis

After reviewing the requirements of the license agreement, the court concluded, “These provisions in the license agreement are consistent with the quality and operational standards commonly contained in franchise agreements to achieve product and marketing uniformity and to protect the franchisor’s trademark. They are insufficient to establish a master/servant relationship. More particularly, they do not establish that Arby’s controlled or had the right to control DRI’s hiring and supervision of employees, which is the aspect of DRI’s business that is alleged to have caused the plaintiffs’ harm.”

The court noted that the only provisions concerning the specific issue of personnel are “broad and general.”

The court found, “By the terms of this agreement, DRI has sole control over the hiring and supervision of its employees. Arby’s could not step in and take over the management of DRI’s employees. Arby’s right to terminate the relationship because of an uncured violation of the agreement is not the equivalent of a right to control the daily operation of the restaurant or actively manage DRI’s work force. Accordingly, we agree with the court of appeals and the circuit court that there is no genuine issue of material fact as to whether DRI is Arby’s servant for purposes of the plaintiffs’ respondeat superior claim against Arby’s: clearly it is not. Arby’s cannot be held vicariously liable for DRI’s alleged negligent supervision of Pierce.”

Accordingly, the court affirmed.

Click here for Case Analysis.

David Ziemer can be reached by email.

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