In two recent decisions, courts have refused to dismiss cases seeking to hold the franchisor liable for the alleged bad acts of its franchisees.
In the first case, Soto v. Superior Telecom, Inc., 2010 WL 2232145 (S.D. Cal. June 2, 2010), the plaintiff brought suit against 7-Eleven and one of its franchisees alleging that a phone card purchased from the franchisee's store failed to provide the full amount of promised calling time, and that it failed to display information regarding rates, charges and fees, as required under California law. The court rejected 7-Eleven's contentions that the plaintiff failed to state a claim against it because the franchisee was an independent contractor, and that the plaintiff's allegations of joint management were insufficient to impose liability on 7-Eleven. The court found that the complaint's allegations were more than conclusory, bare assertions, noting that the plaintiff specifically alleged that 7-Eleven required its franchisees to sell prepaid cards; devoted substantial time to marketing the cards by mandating the specific products that franchisees are required to sell and negotiating the purchase terms for such products; jointly shared the profits and losses of such cards with its franchisees; and possessed joint management and control over the sales of the cards. The court further found that, taking the plaintiff's allegations as true, the complaint adequately stated a claim for relief against 7-Eleven. Recognizing that in appropriate cases, a franchisee may be the franchisor's agent, the court concluded that the plaintiff made sufficient allegations from which a jury could find that 7-Eleven exercised enough control over the franchisee to support a finding of implied agency. As a result, the court refused to dismiss 7-Eleven from the case.
In the other case, Bauer v. Douglas Aquatics, Inc., Bus. Franchise Guide (CCH) ¶ 14,459 (N.C. Ct. App. Sept. 7, 2010), a North Carolina state court found that a pool construction franchisor's apparent agency relationship with a franchisee was sufficient to confer personal jurisdiction over the nonresident franchisor. The court determined that while the franchisor presented sufficient evidence that the franchisee was not its actual agent—e.g., the provision in the franchise agreement expressly disclaiming an agency relationship—the allegations in the complaint were sufficient to support the assertion that the franchisee was the franchisor's apparent agent. In support of its conclusion, the court noted that the franchisor represented on its website that the franchisee was "one of five [of the franchisor's] locations" and that the franchisor "opened its fifth location in Charlotte, North Carolina, in 2005," trading under the franchisee's name. The court also noted that the franchisee represented itself to the plaintiff as part of the franchisor, and that the contract at issue in the case identified the franchisor as the party responsible for the basic construction of the pool. The court found that, taken together, these allegations demonstrated a sufficient measure of control by the franchisor over the franchisee to support a finding that an apparent agency relationship existed between the two parties. This apparent agency relationship was, in turn, sufficient to support the conclusion that the franchisor could be considered legally responsible for the acts of its franchisee for purposes of personal jurisdiction.
For additional information on this, please see "Franchisor Vicarious Liability—The Risks Continue" in the April 26, 2010 Franchise Alert.