Alert – Estate of Anderson v. Denny's Inc. – A Call to Clarify Vicarious Liability Law for Franchisor/Franchisee Relationships

March 20, 2014
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A recent case out of the United State District Court for the District of New Mexico creates potentially serious liability issues for franchisors.  In Estate of Anderson v. Denny’s Inc. (2013 U.S. Dist. LEXIS 173619), the Court examined whether a franchisor can be held vicariously liable for injuries to a franchisee’s employee, notwithstanding the fact that the subject franchise agreement expressly denied any agency or employee relationship between the franchisor and franchisee.  While the Anderson Court did not decide the issue, it did observe that the lack of any judicial consensus on the issue suggests that a bright-line rule is necessary.

 

Barreras Enterprises (“Barreras”) operated a Denny’s franchise in New Mexico.  One of its employees, Stephanie Anderson, was shot and killed during a robbery.  Ms. Anderson’s estate sued Denny’s, Inc., under a theory of vicarious liability based on the contention that Denny’s was liable for Barreras’ failure to maintain a safe work place.  Denny’s proceeded to file a motion for summary judgment on the grounds that (1) Barreras was neither an agent nor employee of Denny’s, and (2) Denny’s could not be held responsible for Barreras’ alleged conduct.

 

In reviewing the case, the Anderson Court acknowledged that it was undisputed that the franchise agreement between Denny’s and Barreras was clear that Barreras was neither an employee nor agent of Denny’s.  The Court also acknowledged that Anderson was a Barreras employee, not a Denny’s employee, at the time of her death.  Nevertheless, the Court ultimately denied the motion for summary judgment on the grounds that the facts did not establish as a matter of law that Denny’s was not involved in the day-to-day operations of its franchisee. 

 

The Court framed its analysis by observing the fine line that franchisors must walk in order to avoid subjecting themselves to vicarious liability, while at the same time, protecting their trademarks.  On the one hand, the Lanham Act imposes affirmative obligations on franchisors to protect and control its licensees in order to maintain federal registration.  This legal obligation was evident in Denny’s franchise agreement (as in most franchise agreements), in the form of specific obligations that Denny’s imposed upon its franchisees regarding their operations of the Denny’s franchises.  On the other hand, the question of vicarious liability depends on the amount of control asserted over an agent, which compels franchisors to take somewhat of a “hands off” approach to their franchisees in order to maintain a degree of separation.  The Anderson Court acknowledged the difficulty which this situation presents to franchisors, whom it noted “are often caught between the Scylla of failing to exercise sufficient control to protect their marks, and the Charybdis of exercising so much control they are vicariously liable for the torts of the franchisees or other licensees.” 

 

With these facts in mind, and given that it sat in diversity jurisdiction, the Anderson Court addressed the vicarious liability issue from what it believed to be the perspective of the New Mexico Supreme Court.  Citing the controlling case of Ciup v. Chevron U.S.A., Inc., 122 N.M. 537 (N.M. 1996), the Anderson Court defined the controlling rule as “whether the franchisor had the right to control the day-to-day operations of the franchisee.”  Based on the facts presented in the Anderson case, the Court felt compelled to deny summary judgment as there existed questions of fact as to what degree Denny’s did (or could) control the day-to-day operations of Barreras. 

 

In reaching this conclusion, the Court lamented that the “right to control” analyses most courts employed “are so malleable and manipulable that they create confusion, litigation, and uncertainty, and, worse, any result from the tests looks result oriented, either pro-plaintiff or pro-industry, thus undermining the integrity of the court process.”  The Anderson Court commented that “[t]he courts probably should have bright-line rules: either all franchisors should be vicariously liable or none should.” 

 

After the ruling on the motion for summary judgment, the Anderson case was settled.  However, given the stakes for franchisors, it is highly likely that the ambiguity in vicarious liability law will be addressed judicially, or legislatively, in the near future.  In view of the different treatments of this common question by the states, it is possible that a federal appellate court will feel inclined to create a bright-line rule.  

 

The question that franchisors must ask is how they can craft their franchise agreements to maintain control over their franchisees, yet at the same time remain distant enough that they do not expose themselves to vicarious liability.    Until the law is clarified, franchisors would be well served to review their franchise agreements in a state-specific manner, and revise the agreements as necessary in order to comport with the controlling vicarious liability tests in the various states in which they operate.