Franchise 101: Something in the Water; and Detailing Within a State Addendum
Franchisor 101: Something in the Water
A Mississippi federal court granted summary judgment in favor of Leisure Systems, Inc. (“LSI”), a franchisor of Yogi Bear themed children’s parks and campgrounds, on negligence and premises liability claims. The case was brought against LSI and its franchisee after eleven children contracted a dangerous strain of E. coli bacteria from two pools at a franchised camping resort. The court found that LSI did not owe the plaintiffs a duty to make the pools reasonably safe.
The plaintiffs alleged LSI owed them a duty of reasonable care because LSI knew about proper pool maintenance but was willfully blind to whether the franchisee was keeping the water safe. LSI moved for summary judgment on the basis that it was merely the franchisor, and LSI did not operate the pools in question.
Since there was no binding authority in Mississippi for when a franchisor owes third parties a duty of care in negligence cases, the court relied on several pool injury cases against hotel franchisors in holding that a franchisor is not undertaking to protect guests at its hotels merely by providing brand-protecting standards to franchisees. Rather, there must be proof that the franchisor assumed or retained control over water-management operations at the pools before finding that it had a legal duty over water safety.
Accordingly, the court looked at whether there was evidence that LSI assumed or retained actual control over water-management operations at the franchised location.
Pointing to LSI’s manual, the plaintiffs noted 800 pages of extensive guidelines and standards for the operation of the franchise but did not mention water safety. The plaintiffs also claimed that LSI’s audit of the facility specifically and intentionally excluded water safety. They further complained that LSI received complaints and provided notices to the franchisee relating to water quality a few weeks before the outbreak, but LSI had not actually entered the facility to correct the issue after receiving complaints.
The court disagreed with the plaintiffs and found all of these facts supported LSI’s argument that it lacked the required control over the day-to-day operations of the pools to trigger a legal duty to the plaintiffs.
A franchisor’s best defense against a personal injury claim is avoiding affirmative steps to operate or manage a franchised location or being involved in day-to-day business matters of a franchisee. In appropriate cases, franchisors should seek indemnification from franchisees for claims that arise out of the franchisee’s operation of the business. Franchisors should also confirm they are named as additional insureds on their franchisees’ insurance policies if required under the franchise agreement.
Franchisee 101: Detailing Within a State Addendum
A California federal court partially granted a motion to compel arbitration by car care franchisor Spiffy Franchising. However, the court invalidated provisions in the franchise agreement providing for dispute resolution in North Carolina and North Carolina governing law. The court severed some provisions from the arbitration clause in the franchise agreement, finding that the parties lacked mutual assent to them.
The franchisee alleged that Spiffy engaged in fraudulent business practices and misrepresentations in providing promised supervision, training, and supplies, access to nationwide accounts and assistance with the franchisee’s business model using existing infrastructure and resources.
After mediation did not resolve the dispute, Spiffy filed a motion to compel arbitration of the franchisee’s complaint in North Carolina. The franchisee opposed on the grounds that there was no valid agreement to arbitrate, that the arbitration provision was unconscionable, and that if the arbitration provision was enforceable, it was waived.
The court held that Spiffy failed to demonstrate mutual assent to arbitrate disputes in North Carolina under North Carolina law because the California Addendum to the franchise agreement provided that the North Carolina forum selection and choice of law clauses “may not be enforceable under California law.” The court also noted a lack of evidence that Spiffy indicated an intention to enforce the North Carolina provisions.
However, the court did not render the entire arbitration clause unenforceable.
Recognizing that franchise agreements have some characteristics of adhesion contracts, the court determined that there was no procedural unconscionability. There was no oppression because the franchisee had over two weeks to review the franchise agreement, during which her attorney reviewed, red-lined, and commented on many terms, and Spiffy promptly responded to and incorporated most of their proposed changes. Subsequent emails demonstrated the parties continued to negotiate and the franchisee actively participated, which negated franchisee’s allegations of unequal bargaining power.
The court also rejected the franchisee’s argument that Spiffy waived arbitration by taking too long to respond to the franchisee’s written notice of intent to arbitrate after a failed mediation. The court found that Spiffy responded to the franchisee attorney’s notice in under a month, provided an explanation of case load, and tried to further discuss resolution. The court did not find such conduct inconsistent with Spiffy’s right to arbitration.
Franchisees should be mindful of the impact that mandatory state addenda in franchise disclosure documents and franchise agreements can have on enforcing arbitration in franchise registration states. Even when arbitration is compelled, courts can play a significant role in shaping the parameters of arbitration. Franchise counsel should be called upon to assess the extent a court will maintain the integrity of the franchisor’s chosen dispute resolution procedures.