In other words, rather standard franchise agreement provisions requiring a franchisee to operate in accordance with its franchisor’s standards, and granting the franchisor a right of inspection to ensure that such compliance is forthcoming, may alone be deemed sufficient for a court, as in this case, to find requisite franchisor “control” over the franchisee instrumentality of harm that caused injury to a third party. A relatively antiquated notion – but, clearly, not an obsolete one.

Recent Approach

The more recent and progressive approach to franchisor vicarious liability doctrine is reflected in Martinez v. Higher Powered Pizza Inc., 43 AD3d 670, 841 NYS2d 526 (1st Dept. 2007), in which the Appellate Division, First Department, reversed a Supreme Court decision denying summary judgment to a franchisor sued by a pedestrian injured by a franchisee’s pizza delivery person. Held the court:

The motion court erred in denying summary judgment. The mere existence of a franchise agreement is insufficient to impose various liability on the franchisor for the acts of its franchisees; there must be a showing that the franchisor exercised control over the day-to-day operations of its franchisee (citations omitted) . . . As in the typical franchise agreement, the only control the agreement reserves to Papa John’s involves enforcement of standards . . . This includes the right to perform inspections . . . to ensure compliance with company standards . . .

Retention of such rights does not generally give rise to a legal obligation (citation omitted). In any event, there was no reservation of control over the delivery process or delivery personnel. (The franchisee’s employee) was not an employee of Papa John’s and Papa John’s general counsel avers that it does not own or operate a restaurant in New York County.



Accordingly, the Appellate Division held that Papa John’s ” . . . was entitled to dismissal (of the complaint as against them)” and reversed the lower court.

Statutory Fraud

• And Common-Law Fraud. Franchisor’s Sale of System. Summary judgment was granted to a franchisor defending franchisee claims of New York Franchise Act statutory and common law fraud in relation to its franchisor’s sale of the subject franchise network in Century Pacific Inc. v. Hilton Hotels Corp., 528 F.Supp.2d 206 (S.D.N.Y. 2007).

(Full Disclosure: This author’s law firm serves as franchise counsel to defendant Hilton Hotels Corp. and, further, authored the governing law provision at issue in this case, as detailed below.)

At issue in this action was defendant Hilton Hotels Corp.’s sale of the Red Lion Hotels network. Plaintiffs essentially claimed that Hilton knew of its plans to sell the Red Lion network at the time it entered into Red Lion’s franchise agreements with plaintiff-franchisees, but failed to inform them of this fact.

In an earlier decision in this action, plaintiffs’ claims for two separate violations of the New York Franchise Act were dismissed. Century Pacific Inc. v. Hilton Hotels Corp., 2004 WL 868211 (S.D.N.Y. 2004). At issue in this earlier decision was the subject franchise agreement’s “governing law” provision which designated New York law as controlling but which specifically carved out any application of the New York Franchise Act unless, by its terms, it would otherwise apply to a dispute (i.e., in circumstances where the subject franchisee was domiciled in New York, or franchise offer and sale activity transpired in New York). Since the New York Franchise Act would not, by its terms, otherwise apply in this case (Hilton has its principal place of business in California and the subject Red Lion franchisees were headquartered in Colorado, and it was uncontested that absolutely no franchise offer or sale activities took place in New York), plaintiff-franchisees’ New York Franchise Act claims were dismissed in the court’s 2004 decision.

Remaining were plaintiffs’ common-law fraud, negligent misrepresentation and fraudulent omission causes of action against Hilton Hotels.

In granting summary judgment to defendants on all remaining causes of action, the court observed that it appeared clear that, at the time Red Lion (then owned by Hilton Hotels) entered into franchise agreements with plaintiffs, Hilton may have thought about – but certainly had neither any intent nor plans to – sell its Red Lion chain. That intent came later, held the court, with the sale of the Red Lion chain actually accomplished in 2001.

In granting summary judgment to Hilton Hotels on all remaining causes of action, the court held:

To satisfy the first element of common law fraud, Plaintiffs must show by clear and convincing evidence that Defendants made a material false representation . . . . To borrow language from songwriter Dusty Springfield “wishing and hoping and thinking and praying, planning and dreaming, each night of (Hilton’s) charms” cannot constitute a material false representation . . . (Plaintiffs) claim only to have received the broad sense that Defendants would forbear from certain action, without pointing to a particular representation by Defendants so stating . . .

Plaintiffs must also establish the second element: that Defendant intended to defraud Plaintiffs at the time their representatives made material false representations (citation omitted) . . . Plaintiffs have failed to meet this test . . . . (T)he narrow issue on this claim element for summary judgment is whether the combined inferences from Plaintiffs’ evidence is such that a rational finder of fact could conclude by clear and convincing evidence that Defendants intended to defraud the plaintiffs at the time their representatives made material false representations. The Court concludes that even giving every favorable weight which could arise from creditability determinations at trial, a reasonable factfinder still could not hold for Plaintiffs . . .

Even accepting that analysts at Hilton, prior to Hilton taking ownership of Red Lion . . . modeled and conducted financial planning weighing the merger with a discontinuance or divestiture of Red Lion, the Court cannot see how this shows evidence of a fraudulent plan by the executives in charge of Red Lion after the merger . . . (T)hat a large corporation such as Hilton would constantly reevaluate its portfolio of companies to make decisions maximizing return to shareholders is evidence of appropriate fiduciary conduct and not of fraudulent intent . . . Just as the ultimate sale (on Dec. 31, 2001) itself cannot infer fraudulent intent at the time of the franchise agreements (March and April, 2001, respectively), so it is that the reasons justifying such ultimate sale and making it a rational act for a large corporation cannot infer fraudulence in a statement of intent at the time of making of the Franchise Agreements.

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