Franchise 101: Franchisor Cannot Massage its Way Out of Vicarious Liability; and Insurance Franchisor Cannot Mitigate Franchise Claims

Franchisor 101: Franchisor Cannot Massage its Way Out of Vicarious Liability

A Texas court of appeals affirmed judgment in favor of a plaintiff who claimed a franchisor was vicariously liable for a franchisee’s employee’s wrongful conduct.

Plaintiff, a customer of a massage salon franchised by Massage Heights Franchising, LLC (“MH Franchising”), alleged she was sexually assaulted by the franchisee’s employee, a massage therapist, during plaintiff’s massage. Plaintiff sued the employee, franchisee and MH Franchising asserting multiple claims, including negligence, premises liability and vicarious liability.

At trial the plaintiff introduced evidence of emails showing that MH Franchising was aware of sexual assaults at its franchises, a copy of the franchise agreement, and the operations manual, and an expert witness who testified regarding franchise operations. MH Franchising did not present any witnesses and moved for a directed verdict on all of plaintiff’s claims, arguing that the employee’s criminal act broke the chain of causation. The trial court denied MH Franchising’s motion and allowed the case to go to the jury. The jury found MH Franchising was 15 percent responsible and awarded plaintiff damages.

MH Franchising appealed, arguing it did not retain control over a franchisee’s hiring, firing, and supervision of employees, among other arguments.

The appellate court concluded there was sufficient control because under the franchise agreement and MH Franchising’s manual, the franchisor controlled the “minutia” of its franchise locations and the work performed by the massage therapists, including how massage therapists were trained; the process to earn customers’ trust and interact with clients before, during, and after sessions; and how the massage therapists were to drape undressed guests. The court also found MH Franchising directed the order in which a franchisee’s massage therapist was to perform the work and overall customer appointment.

The appellate court rejected MH Franchising’s arguments that it could not maintain the requisite control because the franchise agreement provided that the franchisee is an independent contractor and sole operator of its business. Although the franchise agreement says franchisees, not MH Franchising, are to make independent decisions regarding hiring, firing, and training of staff, the court found MH Franchising was not excused from its duty to act reasonably over the areas in which it did retain control—providing massages to customers by massage therapists.

Franchisors are often sued along with franchisees when a franchisee’s employee commits wrongful conduct against a customer. To limit liability, franchisors should consult with franchise counsel to review relevant franchise agreements, manuals, and overall interactions with franchisees to determine where the franchisor’s training responsibilities may cross the line to be deemed excessive control over a franchisee’s operations.

Massage Heights Franchising, LLC v. Hagman, Case No. 14-22-00160-CV, Court of Appeals of Texas, Fourteenth District (Oct. 26, 2023)

Franchisee 101: Insurance Franchisor Cannot Mitigate Franchise Claims

A Wisconsin federal district court allowed an insurance company’s field representative’s allegations that his representation agreement was an unregistered franchise to proceed beyond the pleading stage.

Plaintiff worked for GEICO in various roles since 2002. In 2017 and 2018, GEICO approached plaintiff several times asking that he open a field office and become a field representative for GEICO. Field representatives are “local agents” of GEICO and sell GEICO insurance policies. Plaintiff inquired about the initial investment and expected a profit in pursuing the venture and was allegedly told he would “make a lot of money” and “be in a great financial position.” Plaintiff was also provided spreadsheets detailing financial projections for Seattle and Milwaukee. In response to plaintiff’s request for GEICO’s franchise disclosure documents and operations manual, GEICO stated the field representative is not a franchise.

Based on the representations, plaintiff pursued the opportunity and opened a GEICO field office in Milwaukee, Wisconsin, and executed the GEICO Field Representative Agreement (“GFR Agreement”). When plaintiff did not attain the profits projected or the advertising assistance GEICO represented, plaintiff sued GEICO, asserting Wisconsin Franchise Investment Law (“WFIL”) violations and intentional misrepresentations, among other claims.

GEICO successfully moved to dismiss the WFIL claim based on the statute of limitations since plaintiff had not sued within three years from the day the parties executed the alleged franchise agreement. However, that did not preclude plaintiff’s intentional misrepresentation and fraud in the inducement claims based on the allegations that GEICO sold the plaintiff an unregistered franchise, because those claims begin to accrue after discovery of the fraud.

The district court agreed with plaintiff that whether GEICO is a franchise required discovery to determine whether alleged startup costs, unanticipated build out costs, mandatory fees, and other fees are “franchise fees,” and whether plaintiff was required to operate under a “marketing plan,” within the meaning of WFIL. The district court rejected GEICO’s argument that the exculpatory clause in the GFR Agreement precludes plaintiff’s claims since such clauses are not enforceable when the alleged misconduct is carried out intentionally and recklessly.

The statutes of limitation in many states’ franchise investment laws are complex. Depending on the nature of the alleged violation, franchisees may find themselves afforded little time to seek relief. Those who believe themselves to be “accidental franchisees” should promptly consult with franchise counsel to ensure timely filing of suit.

Rajaraman v. GEICO Indem. Co., Case No. 23-CV-425-JPS (E.D. Wis. Oct. 31, 2023)




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