Bluegrass Business Law

February 24, 2008

Franchisor vicarious liability

In a case of first impression (first time an issue has been ruled upon) in Kentucky, the state’s Supreme Court addresses franchisor vicarious liability in Papa John’s Int’l, Inc. v McCoy, 2005-SC-000614-DG (Jan. 24, 2008)(to be published). Frainchisor vicarious liability is like having a first cousin once removed.

The first cousin of liability is employer vicarious liability which is a well settled area of Kentucky law. In employer vicarious liability (also known as respondeat superior), if an employee commits a tort (a bad act, neglect, etc.) while they are acting within the scope of their employment, then the employer is also liable for the tort even though there is a degree of separation in their relationship. When the employer is a franchisee, then there is an addition degree of separation between the employee and the franchisor.

In this Papa John’s case, Gary McCoy owned a scrap metal business and was working late so he kindly called the pizza place to have pizza’s delivered both to his home and to his office. After prying into the particularities of pepperoni placement upon the pizza, he proffered payment at his place of productivity after they popped the primary pizza off at his private pad (his wife had no doe at home). Once the delivery dude arrived at Gary’s office, things got a little weird.

Either Burke, the delivery guy, hung out voluntarily at Gary’s trying to get a job at Gary’s scrap-yard while watching a video of a deer hunt, or Gary held Burk at the office at gun point and forced him to watch the deer hunt video. Either way, beer and deer were involved. We’ll leave the rest to the imagination, but Burke either escaped or Gary finally got rid of him only after RWT, Inc. began wondering why their driver was gone so long.

Back at Papa John’s, Burke related his hostage related version and another employee called the police. Gary was subsequently arrested for unlawful imprisonment which must have been a bit embarrassing when a story about it ran in the paper a few days later. So, he sued.

None of the foregoing facts were actually pertinent to the court establishing their rule about franchisor liability, but they sure make for an interesting story. The pertinent facts are that Burke worked for RWT, Inc., a franchisee of Papa John’s Int’l, Inc., and Gary McCory claimed he committed a tort against him while acting within his scope of employment. Gary sued Burke, Papa John’s Int’l, Inc. and RWT, Inc. The trial court dismissed the suits against the two business entities for different reasons, but the Court of Appeals reinstated one claim against RWT, Inc., the employer, and two claims against Papa John’s Int’l, Inc.

The Kentucky Supreme Court ruled that the claim against RWT, Inc. could not stand because Burke was acting soley for personal reasons if he made false allegations about false imprisonment; he was acting outside the scope of employment. The Court noted that “there seems no more certain way to send customers to another pizza place than to accuse them falsely of imprisoning delivery drivers when they are delivering pizza. . . .” to highlight the point. If Burke did not lie, then there was no tort. If he did lie, it was for personal reasons. RWT, Inc. is off the hook.

In determining the final issue of Gary’s claims against the franchisor, the Court adopted a rule that enjoys an emerging judicial consensus. They note that a franchise is an agreement between two businesses that licenses the use of intellectual property, brand identiity, marketing, and operational methods for a fee. The rule arrived at was taken from a Wisconsin case, Kerl v. Dennis Rasmussen, Inc., 682 N.W.2d 328. The rule for franchisor vicarious liability now adopted by Kentucky is:

    “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.”

This is actually a slight narrowing of the “control or right of control” rule that it was adapted from because it focuses on the specific aspect of the business causing the tort. In this particular case, Papa John’s Int’l, Inc. had no control or right of control over an intentional and independent course of action taken by Burke and so they are off the hook too.

What this means to franchisors is that if they exercise or contract for the right to exercise control over specific aspects of the franchisee’s business, they may be found liable for torts by employees of the franchisee.

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