Franchise 101: Court Delivers for Pizza Franchisor; and Great Lakes Forum Selection Dispute

Franchisor 101: Court Delivers for Pizza Franchisor

A Texas appeals court affirmed a lower court judgment in favor of Pizza Hut and its franchisee for claims of an alleged sexual assault by a delivery driver. The appellate court held Pizza Hut was not liable for the franchisee’s employee since Pizza Hut did not have the right to control the franchisee’s employment practices.

The appellate court rejected plaintiff’s argument that the franchise agreements and operations manual, requiring franchisees to comply with brand standards, established control by Pizza Hut over franchisee employment practices. The court held Pizza Hut’s requirement that its franchisee comply with franchisor procedures was not evidence of control. Plaintiff did not prove Pizza Hut controlled or had the right to control the franchisee’s hiring practices. Under the franchise agreement the franchisee, not Pizza Hut, controlled the means, methods and details of operations standards, including employment practices such as hiring, termination, and other personnel actions.

The appellate court rejected plaintiff’s ostensible agency claim because plaintiff did not provide supporting evidence. Ostensible agency occurs when the principal makes a representation that causes justifiable reliance resulting in harm. The plaintiff focused on conduct of the franchisee,  not the franchisor. And use of a national brand in general advertising indicates a franchise, not an agency relationship, even if the franchisee’s local advertising was approved by the franchisor.

Plaintiff’s gross negligence claim failed because there was no evidence that Pizza Hut hired the delivery driver, nor that Pizza Hut knew the franchisee hired the driver. Plaintiff did not show a dispute whether Pizza Hut had actual, subjective awareness of the risk involved, but still proceeded with conscious indifference to the rights, safety, or welfare of others, an element of gross negligence. Franchisors should consult with franchise counsel over existing franchise agreements, policies, manuals and training materials, to try to reduce the risk of actual or apparent control over a franchisee’s employment practices. Such review can assist franchisors in defending against tort claims and ostensible agency theories brought by customers or employees of franchised locations.

Franchisors should consult with franchise counsel over existing franchise agreements, policies, manuals and training materials, to try to reduce the risk of actual or apparent control over a franchisee’s employment practices. Such review can assist franchisors in defending against tort claims and ostensible agency theories brought by customers or employees of franchised locations.

See: Doe v. YUM! Brands, Inc., No. 01-19-00844-CV (Tex. App. Nov. 4, 2021)

Franchisee 101: Great Lakes Forum Selection Dispute

A federal appellate court declined to enforce a choice-of-forum clause finding enforcement would conflict with Michigan’s Franchise Investment Law (“MFIL”).

Lakeside Surfaces, Inc., a maker of stone countertops, sued Cambria Company, LLC, a manufacturer of countertop products, in a Michigan federal court for breach of the parties’ Business Partner Agreement, violations of the MFIL and Uniform Commercial Code, and promissory estoppel. Cambria successfully moved to dismiss the case based on the agreement’s forum-selection clause, which required all lawsuits to be in Minnesota state court. Lakeside appealed. The district court held that Lakeside’s allegations adequately pled a franchise relationship, which was not challenged on appeal.

The appellate court reversed the district court’s dismissal, agreeing with Lakeside that the forum-selection clause could be unenforceable if it conflicted with fundamental public policy exemplified by the MFIL. The MFIL requires franchisors to provide franchisees a list of provisions the law renders void, with a written statement telling the franchisee that if these provisions are in the franchise documents, they are void and cannot be enforced against the franchisee. The court found the forum-selection clause was inconsistent with MFIL public policy if a cause of action was made pursuant to the MFIL. The appellate court noted its holding was limited to causes of actions under the MFIL and did not void the forum-selection clause in its entirety.

Franchisees should consult franchise counsel to review franchise agreements with forum-selection clauses, evaluate in what jurisdiction the franchisee will be required to sue and whether any state laws apply, such as in Michigan and California, that make a forum-selection clause unenforceable for violations of laws that seek to protect franchisees.

See: Lakeside Surfaces, Inc. v. Cambria Co., No. 20-1335 (6th Cir. Oct. 15, 2021)