Franchise Lawyer Blog

Franchisor Vicarious Liability

This morning we received an email blast from Field Fisher Waterhouse, a UK firm, reporting on a recent Kentucky case (Doctors’ Associates, Inc. v. Uninsured Employers’ Fund, 2011 WL 5878145) on the subject of franchisor vicarious liability. The Kentucky Supreme Court found that Doctors’ Associates, Inc., which owns the “Subway” trademark and franchises the right to operate Subway sandwich shops worldwide, was not liable for a franchisee’s employees’ worker’s compensation benefits for a work-related injury.

In deciding the case, the court held that the franchisor was not an “up-the-ladder” employer under Kentucky law and that Doctors’ Associates, Inc. did not control the day to day activities of the franchisee, a critical element if vicarious liability was to be found. The court noted that despite retaining certain rights such as the right to be named an additional insured, receipt of notice of cancellation of insurance, the right to inspect the franchisee’s premises and business records, nevertheless Doctors’ Associates, Inc. was not considered to control the franchisee’s activities.

In reviewing the Doctors’ Associates, Inc. case, it occurred to us to review and highlight the law on this issue in our state, New York. We have written on this topic previously in this franchise law blog. Generally, a franchisor in New York will not be held vicariously liable for the actions of its franchisees if the franchisor did not retain control over the franchisee’s day to day actions. These cases are decided on a case by case basis and are heavily dependent on the particular set of facts at hand.

As a practical matter and as stated in Rupert M. Barkoff’s November 30, 2011 article in the New York Law JournalVicarious Liability: Interplay of Franchise and Trademark Laws, franchisors should: (1) avoid controlling their franchisees’ day to day activities; (2) require that the franchisees hold themselves out to the public as an independent operator of their respective franchised businesses; (3) avoid making employee hiring/firing decisions for its franchisees; and (4) offer suggestions and recommendations for franchisees to follow in connection with the operations of their franchised businesses rather than a prescribed set of requirements.

These nuances can be fully addressed in the franchise agreement. Our franchise agreements have developed over time to provide franchisors with sufficient control over essential elements, such as trademark and system integrity, while trying not to get bogged down in day to day operations, always considering potential vicarious liability issues.

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