David Cahn has an interesting, although I believe flawed, view of some recent franchisor liability cases.

"Even in the best of franchise relationships, franchisors must be wary of litigation and potential liability arising out of their franchisees' business operations.

Where a franchisor imposes and exercises substantial controls over its franchisees' operational and administrative methods and procedures, the franchisor may well find itself a defendant in lawsuits brought by customers and employees of its franchised outlets, claiming that the franchisor's exercise of control makes it liable for its franchisees' negligence or misconduct."

The dilemma here, many see, is between exercising significant enough control through the standards as enunciated in the operating manual to prevent the harm from occurring, and exercising minimal control through providing only recommendations and no guidance to prevent vicarious liability attaching.

David appears to concur, and after reviewing two Jackson Hewitt cases on vicarious liability, states:

"The conclusion to be drawn from the Jackson Hewitt litigation is that franchisorsare essentially presented with two options when drafting their franchise agreements and operations manuals.

The first option is to impose significant operational controls over their franchisees' operations, similar to those described above, and assume the attendant risk of facing liability for third-party claims arising from actions taken in accordance with the operational mandates.

The other option is to limit the franchise operations manual to providing examples, general guidance and non-mandatory recommendations for operating procedures and specifications."

My view is that this dilemma should be avoided: the franchisor should be able to limit their liability and decrease the risk from happening.

Ideally, there should exist franchise owner's group who agrees to a) provide the franchisees with sophisticated risk avoidance mechanisms, b) monitor and report their use, and c) provide continual education on compliance.

Naturally, the franchise owner's group is going to want to something in return for such a project. And such an agreement should be beneficial to the franchise system as a whole.

An example was discussed here in this story about PCI compliance (see the comments)

A franchise owner's group that can effectively take on this responsibility is a potential real win/win for the franchise system and all its constituents.

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When your franchise system is facing this type of danger, connect with me on LinkedIn and we will see what can be worked out.

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