IDI Conference June 13, 2013

1. Vicarious Liability Of TheFranchisor For Acts AndOmissions Of The FranchiseesAnd Their Employees:Canada, Italy AndThe United States IDI ConferenceJune 13, 2013

2. Mariaelena Giorcelli is an Associate of the Law firm Buffa, Bortolotti & Mathis Studi Legali Associati, Turin, Italy in the International Commercial Contracts, Intellectual Property and Cross Border Litigation practice groups. Mariaelena speaks fluent Italian, English, French and German.Graduate: Faculty of Law, University of Turin, Italy (JD. 2000) Publications • “Fidelity Cards Regime According Privacy Rules”, in Mercato Globale, 2007 • “Warranty In The Professionals/Consumers Sale”, in Mercato Globale, 2005, n. 135, p. 1 ss • “Origin Marks And Made In Italy Protection”, in Mercato Globale, 2005 • “The New Franchising Contract Law”, in Mercato Globale, n. 9, 2004 • “The New Specialized IP Court In Russia”,  in Newsmercati, 2013 n. 147 • “International Franchising Agreements: Precontractual Disclosure Obligations” to be published in June 2013 Telephone: +39011-5741111 Email: m.giorcelli@bbmpartners.com Website: www.bbmpartners.com 2

3. Dominic Mochrie is a partner in the Toronto, Ontario, Canada office of the Osler law firm. Dominic focuses on franchise and distribution, privacy law, product marketing law and trade practice law. He provides practical and business-friendly advice to clients engaged in distribution and franchising matters. Clients include domestic franchisor start-ups working to establish a new franchise system to large, multinational franchisors with thousands of franchisees. Dominic regularly prepares franchise agreements, master franchisee agreements, area developer agreements, provincial and national disclosure documents. Dominic also assists clients with establishing and managing distribution systems, including drafting distribution agreements and product supply agreements. Additionally, Dominic provides advice to clients on all aspects of managing relationships with franchisees and distributors. Dominic also advises on franchising issues arising in the context of acquisition of everything from single unit franchises to entire franchise systems. Dominic also supports clients in respect of various trade practice matters, including consumer protection and marketing matters. Telephone: 416-862-5994 Email: dmochrie@osler.com Website: www.osler.com 3

4. Carl Zwisler is a principal in Gray PlantMooty's Franchise & Distribution practice group and focuses his practice on the representation of franchisors, manufacturers, and investors in structuring, negotiating and enforcing U.S. and  international franchise, licensing distribution and acquisition agreements. With more than 35 years experience, Carl has worked with clients in every phase of U.S. and international franchising, licensing, and distribution programs, frequently advising companies entering the U.S. market and U.S. companies expanding abroad. Telephone: 202-295-2225Email: carl.zwisler@gpmlaw.com Website: www.gpmlaw.com 4

5. Overview Of Franchising Vicarious Liability Approaches In Italy, Canada And The USA 5

6. Vicarious Liability Of FranchisorsIn Italy General Principles “Franchising is a contract, however named, concluded between economically and legally independent parties, […]” Art. 1, paragraph 1, Law n. 129 dated May 6, 2004

7. Vicarious Liability Of FranchisorsIn Italy Consequently: • Franchisor is not liable for acts or omissions of the Franchisee towards third parties: • employees (Ministry of Labour, Oct. 12, 2009) • suppliers • final clients • public authorities

8. Vicarious Liability Of FranchisorsIn Italy Exceptions to the general rule: • need to protect the third party’s reasonable reliance on the Franchisor-Franchisee relationship (apparent authority) • need to protect the rights of the employees

9. Vicarious Liability Of FranchisorsIn Italy Reliance /Apparent Authority: • determined by the conduct of the Franchisor • acts or omissions of the Franchisor and the Franchisee (negligence of the Franchisor) • determined just by the conduct of the Franchisee

10. Vicarious Liability Of FranchisorsIn Italy Employees protection: • exception to the general rule is very seldom Trib. Milan, June 25, 2005: • Franchisor and Franchisee have been considered as a sole employer’s organization (the Franchisor’s area manager directly organized the working hours, addressed disciplinary letters, and handed over to the employee the dismissal letter)

11. Vicarious Liability Of FranchisorsIn Canada Master-Servant Relationship • Franchisors have been held liable as employers of the Franchisee’s employees: • For taking over day-to-day operations of the franchise (Youngblut v Jim Jaklen) • Using the Franchisee’s employee’s services in tandem with Franchisee (Kent v Stop ‘N’ Cash) • Control over a significant part of operations (Petro-Canada) • Franchisors have been held liable as employer of the Franchisee • Some control in the franchise context permitted (Toshi (reversed); Youngblut) 11

12. Vicarious Liability Of FranchisorsIn Canada Apparent Authority • Franchisors have been held liable for acts or omissions of the Franchisee where the Franchisee had apparent authority to act on its behalf arising from: • Failure to distinguish between the Franchisor and the Franchisee (Fraser v U-Need-a-Cab) • Representations made by the Franchisor that failed to identify the system as a franchise (H&R Block) Duty of Care • Franchisors have been held liable for assuming a duty of care (Toshi 2007, but reversed in Toshi 2008) 12

13. Vicarious Liability Of FranchisorsIn United States General Principle General franchise operating requirements are usually not enough to establish control or a right of control giving rise to liability. Rather, a Franchisor may be held vicariously liable for the tortious conduct of its Franchisee only if the Franchisor has control or a right of control over the daily operation of the specific aspect of the Franchisee’s business that is alleged to have caused the harm Agency Theory The most common method plaintiffs use to attempt to impute vicarious liability to Franchisors is agency theory. Agency theory has two branches 13

14. Vicarious Liability Of FranchisorsIn United States Actual Agency • The first is actual agency. Under actual agency theory, the principal (the Franchisor) is alleged to have exerted enough control over the agent (the Franchisee) that the law presumes the agent is acting on behalf of the principal. Traditionally, a Franchisor in an actual agency relationship would be liable for all the actions of the Franchisee by virtue of the agency relationship alone. The central question in determining actual agency is the level of control the Franchisor exerts over the Franchisee 14

15. Vicarious Liability Of FranchisorsIn United States • In determining whether actual agency exists, courts evaluate the extent of control the Franchisor exerts over its Franchisee. Most Courts employ the “day-to-day operations” test. • Plaintiffs must establish that the Franchisor’s control is so extensive as to be regarded as regulating the day-to-day operations of the Franchisee • A Franchisor’s efforts to protect its trademark, including the adoption of policies and procedures designed to maintain the quality and uniformity of products or of consumer experiences at franchised outlets will not generally lead to a finding of an agency. • When Franchisors prescribe, in detail, to the specifics of their Franchisees’ business operations, actual agency is often found to exist 15

16. Vicarious Liability Of FranchisorsIn United States Apparent Agency • Apparent agency exists, if a Franchisor, through its action or inaction, induces an innocent third party to reasonablybelieve that the Franchisee is the Franchisor’s agent or that the third party is dealing with the Franchisor • If the third party relies on this (mis)representation or belief to its detriment, an apparent agency exists, even in the absence of a true principal-agent relationship 16

17. Vicarious Liability Of FranchisorsIn United States • Under California law, a principal will be liable for the act of an apparent agent if: • the person dealing with the agent does so with belief in the agent’s authority, and this belief is reasonable; • the belief is induced by some act or neglect of the principal; and • the plaintiff was not negligent in relying on the agent’s apparent authority 17

18. Vicarious Liability Of FranchisorsIn United States Franchisors’ Employer Liability • Employment Claims against Franchisors include: wrongful termination, civil rights discrimination claims, sexual harassment claims and violation of various labor statutes • A Franchisee may be deemed the Franchisor’s agent, even if the agreement provides that the Franchisee is an independent contractor, if the Franchisor assumes substantial control over: • the Franchisee’s local operation, • its management-employee relations, • or employee discipline 18

19. Vicarious Liability Of FranchisorsIn United States • To determine whether a Franchisor is a joint employer, courts examine the Franchisor’s: • authority to hire and fire employees, promulgate work rules and assignments and set conditions of employment, including benefits, compensation and hours; • day-to-day supervision of employees including discipline; and • control of employee records, including payroll, insurance, taxes and the like • No single factor is dispositive in determining whether a Franchisor is a joint employer with its Franchisee 19

20. Applying the Law 20

21. Example 1 • In the case at issue, a Franchisee’s employee alleged suffering sexual harassment, assault, battery, and constructive wrongful termination at the hands of the Franchisee’s business manager • The employee, a minor, filed suit against the manager, the Franchisee, and the Franchisor alleging these were her employers, and that they were vicariously liable for the manager’s actions under the doctrine of respondeatsuperior • Before the case was heard, the Franchisee filed for protection under federal bankruptcy laws and was dismissed from the case 21

22. “The court noted that: • Franchisee testified that Franchisor forced it to fire the manager who had allegedly engaged in the wrongdoing, and that the Franchisee feared it would lose its franchise if it did not comply with the Franchisor’s demands; • the franchise agreement gave the Franchisor the right to set the qualifications for the Franchisee’s employees and their permissible “demeanor;” • Franchisees were required to use the Franchisor’s computer programs to train employees; • Franchisor’s guidelines describe specific employment hiring requirements for all personnel involved in product delivery; • Franchisor had independent electronic access to the Franchisee’s data; and • Franchisor designated the Franchisee’s bookkeeping and recording methods 22

23. Example 2 • Janitorial Services Franchisor enters into cleaning contracts on behalf of its Franchisees with building owners and managers, and bills customers for services provided by its Franchisees. The Franchisor deducts its franchise fees and related fees from payments it collects from customers and remits the balance to its Franchisees • Franchisees sue Franchisor claiming misclassification as “independent contractors” under applicable law, resulting in loss of employment benefits • Under Massachusetts law, a relationship is an independent contractor, rather than employer-employee relationship, exists only if: 23

24. 1. worker is free from control and direction in connection with the performance of a service; 2. service performed is outside the usual course of business of the putative employer; and 3. worker is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed • The Franchisor has company-owned operations which provide cleaning services to customers, just like its franchisees. 24

25. Example 3 • The California Attorney General filed a complaint against an income tax return preparation Franchisor for several violations of consumer protection laws, including false “refund-anticipation loans” and “electronic refund checks”. • The AG claimed that the Franchisor was responsible for the misleading or deceptive statements its Franchisees used in print and television advertising 25

26. The Franchisor argued that the Franchisor-Franchisee relationship required a high level of control, and it controlled the Franchisee’s advertising only to the extent necessary to protect its trademark and goodwill • Appellate court: • Franchisor’s operations manual demonstrated control far beyond of what is needed to police its marks. • Emphasized that Franchisor’s “particularly extensive” right of control over Franchisee advertising, which it used to not only protect its marks, “but also to dictate business strategy to Franchisees” 26

27. Franchise Agreement Language To Protect Franchisors From Claims 27

28. The Parties are independent contractors, no agency relationship exists and neither Party shall have the right to bind the other • The Franchisee shall submit to the Franchisor, for its prior approval, copies of all advertising and promotional materials it plans to use 28

29. Drafting The Franchise Agreement Set the groundwork in the franchise agreement by stating that: • Franchisor and Franchisee are independent contractors, no agency relationship exists • Franchisee is prohibited from making representations that have the potential to establish any agency, employment, or joint venture relationship with Franchisor • Franchisee is solely responsible for day-to-day operations of its business 29

30. In all agreements and contract forms used by the Franchisee, the Franchisee shall enter into contracts only in its own business entity name, and shall include a bold disclaimer: • This business is operated pursuant to a franchise agreement between Franchisee and Franchisor. The parties are independent contractors. Franchisor is not liable for Franchisee’s debts or for fulfilling Franchisee’s obligations under this Agreement • Franchisee shall not open any bank account, incur any debts or apply for credit in the name of or using the name of the Franchisor 30

31. Franchisee has sole control over Franchisee’s employees, including their hiring, their wages and their terms of employment • In all employment applications and employee manuals, the Franchisee shall include, in bold, the following notice: This business operates pursuant to a franchise agreement between Franchisor and Franchisee. Only Franchisee is your employer. Only Franchisee may hire or fire you, set your wages, establish the hours and terms of your employment and resolve any employment related disputes you may have. You will not be/are not an employee of Franchisor 31

32. Franchisee shall post a notice on its premises, which is in plain view of its customers, which reads: • This business is operated pursuant to a franchise agreement between Franchisee and Franchisor. Franchisee alone is responsible for conducting this business • Franchisee agrees to indemnify Franchisor and its affiliates and their respective representatives and their employees and agents against all claims arising out of the manner in which Franchisee has conducted its business 32

33. Franchisee shall carry all such insurance policies as Franchisor shall prescribe, with at least the minimum coverage prescribed by Franchisor, and shall name Franchisor and its affiliates and their representatives, directors, agents and employees as an additional insured on all such policies • Franchisee shall cause its insurance carriers to provide notices of all such policies and notices of any modification or cancellation at least 30 days before any such coverage changes or is terminated 33

34. If Franchisee fails to carry any insurance prescribed by the Franchisor, at Franchisor’s option, in addition to any other remedies available to Franchisor, Franchisor may purchase such insurance coverage and charge Franchisee 150% of its cost of procuring the coverage, and Franchisee shall promptly pay Franchisor such amount upon receipt of its demand for payment • Franchisor will not be held liable for injury, death, or property damage of any person caused by the Franchisee’s negligence, action, failure to act, or misconduct whether or not covered by the Franchisee’s insurance 34

35. Franchisee shall, at all times, operate the business in full compliance with applicable laws. Franchisee is responsible for understanding and complying with all laws relating to the operation of the franchised business. Franchisee shall not rely upon any forms or suggestions from Franchisor as legal advice • The franchised business shall, at all times, be operated by a manager who has been approved by Franchisor and who has satisfactorily completed Franchisor’s mandatory training program. Franchisee alone shall decide whom to hire as a manager, and shall be solely responsible for the terms of the manager’s employment 35

36. Practical Advice To Protect FranchisorsFrom Claims 36

37. Practical Advice For Franchisors … Putting the world on Notice • Purchase order forms should not bear the trademarks of the franchise network without also including the Franchisee’s company name • Purchase order forms should clarify that the Franchisee is independent and autonomous from the Franchisor (e.g. by stating: “The trademark […] together with the stamp of the firm (Franchisee) exclusively indicates that the firm is part of the franchising network operating under the Trademark, but in no circumstances can the activity carried out by the firm affect the Franchisor” Tribunal of Fermo, Italy November 3, 2002)

38. Consumers/customers/employees must be advised that the Franchisee is independent of the Franchisor • Advertising and marketing should clarify – implicitly or explicitly – the nature of the relationship • Customers must appreciate which entity they are dealing with • Notices can be included on signs, business cards, receipts, advertisements, letterhead, contracts, cheques, etc 38

39. Franchisors should review all advertising and marketing materials prepared by Franchisees • The Franchisee’s company name should not include the Franchisor’s name • Franchisor should avoid using language that suggests that it guarantees the goods/services of its Franchisees • In the franchise agreement, avoid incorporating any provisions that the Franchisor will be unable or unwilling to monitor and enforce • Franchisors should monitor and enforce standards required by the franchise agreement and operations manuals 39

40. Franchisors should: • Avoid mandating comprehensive employment standards and procedures • Avoid prescribing forms for use in the employment context • Resist the urge to direct Franchisees on employment issues • Carefully consider any hands-on involvement with Franchisees’ businesses 40

41. THANK YOU Dominic Mochrie, Mariaelena Giorcelli and Carl Zwisler 41