The Franchise Memorandum

A federal court in Texas recently denied franchisor Kiddie Academy Domestic Franchising’s motion for summary judgment, rejecting the argument that Kiddie Academy bore no liability under its franchise agreement for the negligence of one of its franchisees. McNeel v. Kiddie Academy Domestic Franchising, LLC, 2021 WL 920108 (S.D. Tex. Mar. 10, 2021). In August 2018, a three-month-old baby was found dead, face down, in her crib in the care of a Kiddie Academy franchisee. The parents brought suit in state court for negligence against both the franchisee and Kiddie Academy, arguing that the franchisor should have exercised contractual rights to prevent and remedy the franchisee’s missteps. After the lawsuit was removed to federal court, Kiddie Academy moved for summary judgment, arguing it was not vicariously liable for its franchisee’s negligence. The district court denied the motion.

Looking to the degree of control that Kiddie Academy had the right to exert over its franchisee, the court concluded that the franchise agreement afforded Kiddie Academy so much control over the franchisee that its negligence could be imputed to Kiddie Academy. The court agreed that a franchisor retaining supervisory rights in the franchise agreement generally would not rise to a degree of control high enough to impute liability. However, Kiddie Academy retained the right under its franchise agreement to control the “operative details” of the franchisee, such as the right to inspect the facility, provide plans and specifications, train the franchisee's childcare directors, and require the franchisee to follow certain operating procedures — including a Safe Sleep Policy establishing safe practices for infants. The court concluded, therefore, that Kiddie Academy could be held vicariously liable for the actions of the franchisee even if it was not exercising control over its franchisee at the time of the accident. Moreover, because Kiddie Academy has the power under its franchise agreement to enter upon the premises in the event of a default (which could have included adherence to the Safe Sleep Policy) and “exercise complete authority with respect to the operation and administration of the franchised business” until the default was cured, the court concluded that Kiddie Academy exposed itself to vicarious liability for its franchisee’s negligence.