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The Franchise Memorandum

Franchisor Not Liable to Unit Franchisee for Most of Master Franchisee's Acts

In an opinion generally favorable to the franchisor in a unit franchisee's attempt to impose vicarious liability on the franchisor for the actions of its master franchisee, the United States District Court for the District of Massachusetts recently granted in part and denied in part a franchisor's motion for summary judgment. Depianti v. Jan-Pro Franchising International, Inc., 2014 U.S. Dist. LEXIS 116943 (D. Mass. Aug. 22, 2014). At issue was the unit franchisee's claims of misrepresentation and unfair and deceptive business practices based on the conduct of Jan-Pro's master franchisee. An arbitration clause in the unit franchise agreement required claims against the master franchisee, but not against the franchisor, to be arbitrated. Thus, only the franchisor was the defendant in the case. The court applied the instrumentality test followed by a majority of courts, which imposes vicarious liability only if the franchisor controls or has a 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 the harm."

Although the master franchisee may have misrepresented that it would provide the unit franchisee $100,000 worth of cleaning accounts annually, Jan-Pro neither controlled nor had a right to control this instrumentality of the claim. Jan-Pro did not control the franchise plan offered by the master franchisee from a menu of franchise plans ranging from $5,000 to $200,000 in cleaning accounts, nor did it impose a requirement on the master franchisee concerning the volume of the unit franchisees' franchise plans. Regarding the unfair or deceptive business practices claims, the court determined that the unit franchisee may have been subject to unfair "underbidding" and to unfair terminations of cleaning accounts, but it could not conclude that Jan-Pro controlled, or had the right to control, the instrumentalities of the master franchisee's business on these pertinent matters. The franchise contract allowed the master franchisee to set its own prices and discounts, and, in practice, the master franchisee made its own decisions on pricing and account termination decisions. However, in response to the franchisee's claims that the amount of franchise fees charged was inherently unfair, the court determined that a reasonable fact finder could conclude that the unit franchisee's contract with the master franchisee was inherently unfair and that Jan-Pro had the right to control that aspect of the master franchisee's business. Jan-Pro had not argued that the unit franchisee's contract terms were fair. The court granted Jan-Pro's summary judgment motion on all but this last claim.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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