Franchisor liability is often based on agency relationships, and vicarious liability is a form of liability without fault. This means that a person injured at a franchise location can file an action against the franchisor as well as the franchisee. For example, A Wisconsin Arby’s franchisee hired a work release inmate who walked off the job and shot his ex-girlfriend and her fiancé at a Wal-Mart. The women lived, but her fiancé was killed. The franchisor and franchisee were sued for negligence in hiring and supervising its employed work release inmate. Ultimately, the court decided that Arby’s had little control over the hiring of the employee and could not be held vicariously liable. Being sued under the principle of vicarious liability due to franchisees’ wrongful acts is just one example of when a franchisor would need to consult with a franchise attorney for an effective defense. A recent joint employer decision from the National Labor Relations Board (NLRB) will have an impact on vicarious liability. If the decision goes into effect, franchisors will have a responsibility and a standard for hiring and human resources decisions.
Franchisee discontent can also morph into litigation. Franchisees can sue franchisors for a variety of reasons, such as non-disclosed operating costs and for opening too many franchises in a geographic area. In a 2007 Muffin Break case, the franchisor set up a franchise to operate its muffin shop in a shopping center and gave the franchisee financial performance projections. The projections failed to come true, and the franchisor was sued by the franchisee. The franchisor was ordered to pay more than $300,000 plus interest on a loan.
Class Action Suits
Franchisors may also find themselves named in a class action lawsuit by franchisees claiming overtime pay, misrepresentation of royalty fees, fraud, costly advertising fees and more. In 2014, two AAMCO Transmissions franchise owners filed a class action lawsuit on behalf of other franchisees alleging deceptive business practices, inflated fees and fraud.