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Arizona Court: Franchisor Found Not Vicarious Liable

Courtland decision represents an important extension of widely adopted franchise law concepts to Arizona.

A federal court in Arizona has agreed with a growing number of jurisdictions that a franchisor is vicariously liable for the actions of its franchisee only if the franchisor exerts control over the very instrumentality that caused the alleged harm. On July 29, the U.S. District Court for Arizona granted summary judgment to franchisor Buffalo Wild Wings Inc., holding that it was not liable for the alleged sexual harassment of the franchisee’s manager. The court citation is Courtland v. GCEP-Surprise, LLC, Case No. 2:12-cv-00349-GMS, Dkt. No. 60 (D. Ariz. July 29, 2013).

In Courtland, the plaintiff sued the franchisee and franchisor, alleging that she was sexually harassed by one of her supervisors, a franchisee employee, and that BWWI should be held vicariously liable for those acts. A default judgment was entered against the franchisee. BWWI moved for summary judgment, arguing that it should not be held vicariously liable because the plaintiff had failed to show either actual or apparent agency. The court agreed.

In analyzing whether the franchisee was an agent of BWWI, the court adopted the “very instrumentality” test, calling it the “predominant test for holding a franchisor vicariously liable.” The court, citing numerous cases across the country, held that a franchisor is vicariously liable only where it “controls or has the right to control the daily conduct or operation of the particular ‘instrumentality’ or aspect of the franchisee’s business that is alleged to have caused harm.”

The “Very Instrumentality” Test

Applying the “very instrumentality” test, the court found that there was no evidence of such control by BWWI. While the court noted that BWWI “maintained strict guidelines as to the presentation and operation” of its franchisee restaurant, it held that this was not tantamount to “control over the Restaurant’s managerial staff.”

ather, the facts adduced by the parties showed that the franchisee “had sole responsibility for hiring, training, supervising, scheduling, compensating, reviewing, and terminating employees as well as addressing HR issues or grievances.” Nor did BWWI monitor whether the franchisee’s “managerial staff complied with employment laws or how they supervised their employees.”

The court distinguished between requirements and recommendations, noting that “any employment guidance that BWWI provided through training materials were merely advisory and franchisees were not bound to follow it.” Under these circumstances, the court concluded that the franchisee was not BWWI’s agent and the company could not be held vicariously liable.

The court similarly rejected the plaintiff’s argument that the franchisee acted under BWWI’s “apparent authority.” The court held that a franchisee’s mere use of a brand through mechanisms such as “logos, signage and marketing materials” was not enough to create an apparent agency relationship. The court also found that the plaintiff pointed to no action by BWWI (as opposed to by the franchisee) that could have led the plaintiff to believe BWWI was her employer. Thus, the court refused to find a basis for vicarious liability under an apparent agency theory.

The Courtland decision represents an important extension of widely adopted franchise law concepts to the State of Arizona. It also provides a guide to franchisors on how to balance the need for uniformity and system standards with the risks of vicarious liability.

Kerry Bundy is a partner and Justin Krypel is an associate in the Minneapolis office law firm Faegre Baker Daniels LLP. Find them at http://fransocial.franchise.org/Home/.

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