The Franchise Memorandum

In Ford v. Palmden Restaurants, LLC, Bus. Franchise Guide ¶ 14,877 (Cal. Ct. App. July 31, 2012), a California Court of Appeal held that the plaintiff had raised a triable issue of fact as to whether Denny’s and several of its affiliated corporate entities could be held jointly liable for the injuries he sustained at a franchised restaurant. The plaintiff brought a negligence action against the franchisee and the Denny’s entities after being attacked by members of a street gang who were known to frequent the premises. The lower court granted summary judgment in favor of Denny’s, finding that it could not be held liable for the franchisee’s acts or omissions with respect to instituting appropriate security measures at the restaurant because the franchisee was not its agent. The plaintiff appealed the judgment on the grounds that there was a genuine issue of fact as to the existence of an agency relationship between Denny’s and the franchisee.

In reversing the lower court’s ruling, the Court of Appeal held that the plaintiff had set forth facts sufficient to allege that the franchisee was Denny’s ostensible agent. The court stated that in order to prevail on an ostensible agency theory, the plaintiff would need to allege that (1) he reasonably believed that the franchisee had the authority to act on behalf of Denny’s, (2) his belief was generated by some act or omission on the part of Denny’s, and (3) he relied on the franchisee’s apparent authority. The court determined that the plaintiff had satisfied these elements because the franchisee used Denny’s name, logo, and other trademarks in the operation of its business without indicating its franchisee status. The court found that the public could not easily know whether particular restaurants were owned by Denny’s or by franchisees. The court further found that the plaintiff had reasonably relied on advertisements identifying Denny’s as a family restaurant in which patrons could enjoy their meal in a safe and secure environment. Denny’s did not challenge the applicability of the ostensible agency theory and instead argued that holding franchisors liable for the wrongful acts of its franchisees would endanger the franchise business model. The court had previously rejected a similar argument and suggested that Denny’s could have protected itself by requiring that its franchisees inform the public of their franchisee status. Finally, the court concluded that Denny’s had waived any challenge to the plaintiff’s argument that the affiliated entities should be treated as alter egos for purposes of the appeal.