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Liability on franchise premises: footing the bill for crime.

Who should be held liable for third-party criminal activities that occur in franchise establishments? And what can bedone to ease the problem?

A customer steps up to the counter to order a taco at Taco Bell and realizes that a robbery is in progress. He rushes to the door to escape but is shot attempting to flee the restaurant. This is the tenth such incident at this store in the past three years, and the robbers have not been caught. Who should be held liable for this criminal action: the franchisor, the franchisee, or both?

This perplexing problem is surfacing repeatedly throughout the United States. Franchise operations are becoming increasingly popular targets for criminals, and innocent customers and employees are being victimized. Victims expect significant recoveries, while franchisors argue that it is unfair to hold them liable for the criminal actions of third parties over whom they have no control. What makes this topic particularly difficult is that it is easy to sympathize with both positions. Equally effective arguments can be raised to support victim recoveries or to support the position of the franchise operation.

In trying to address this dilemma, we shall examine policy reasons supporting the protection of victim and franchisor rights, as well as franchising case law involving criminal activities at operations. This discussion, it is hoped, will lead to some solid recommendations to offer franchises.

Franchising

Franchising is a dominant and effective business format that accounts for more than $800 billion in annual sales and service contracts in the United States. More than 40 percent of all retail sales involve franchises and more than eight million people are employed by franchises in more than half a million outlets.

The franchising format is successful because it allows individuals with little or no specific knowledge and experience to move successfully into business activities they are not personally equipped to handle on a solo basis. With the assistance of specialized training and the power of effective marketing and trade-mark recognition, many franchises are huge successes both for franchisors and franchisees. The former are able to reach new and lucrative markets by expanding through franchisees. The latter, in turn, can gain access to the franchisor's knowledge and resources while owning and operating their own businesses. Moreover, consumers benefit by obtaining uniform quality products that are often in high demand.

Reasons for Protecting Franchisors and Franchisees from Liability

Effective arguments abound for protecting franchise operations from being held liable for the criminal acts of third parties. First, these operations have no control over such actions. Armed robberies obviously are not encouraged and cannot feasibly be prevented or controlled. If liability for illegal activity falls on the franchise operation, it could very well doom the use of this business format. Because this way of doing business is tremendously successful in generating jobs and revenues, franchising must be protected and fostered rather than devastated by liability exposure for actions by uncontrollable third persons.

Imposing liability on franchises could mean security guards would have to be hired at all such operations. Criminal activity can occur at any time and any place, potentially requiring guards during all open hours. This would drive up costs tremendously and may not even be successful in protecting the customers. It can also be argued that police protection is a responsibility of the community and state, not the obligation of private businesses. In several lawsuits, police officers have testified that the best way for businesses to respond when an armed robbery occurs is to turn all cash over to the criminals immediately. If this approach is used, say the officers, there is only a small likelihood of personal injury resulting to a customer.

Further complicating the matter is the realization that the presence of security guards may or may not prevent a particular robbery. Robberies generally take place randomly and unpredictably. Private security guards are not extensively trained like police officers and may be ill equipped to halt criminal activity and protect patrons and employees. Some even argue that security guards may well increase the dangers for victims. Most armed robberies do not result in injuries, so adding the presence of firearms for security guards during an armed robbery potentially increases the chances of serious injury.

Criminal prevention and apprehension are law enforcement activities best left to the responsibility of professional police personnel. In a lawsuit involving a Taco Bell franchise, a judge stated that imposing law enforcement functions on private franchise operations is a "quick-fix solution to a complicated social problem." The judge went on to state that the government's law enforcement duty should not be shifted to the private sector because of the lack of training or expertise security guards have compared to police officers.

Finally, holding franchise operations liable for crimes places them in a no-win situation. If security guards are not hired, the operation may appear careless. If guards are hired and someone is still injured, the franchise is then potentially liable for the careless actions of an inept security guard. Franchise establishments deserve a better fate - protection from such liability.

Reasons for Protecting the Rights of Victims

Franchise operations have long fought lawsuits by crime victims by arguing that they have no duty under the law to protect customers from the consequences of criminal activity. Victims, on the other hand, will argue that they should be compensated for injuries suffered on the premises. From the victim's perspective, broad legal liability will result in safer business operations because criminal prevention will become a higher priority. If franchise operations learn that they will be financially liable for injuries, they will respond with increased security, leading to safer conditions for everyone. Improved technology has created the potential for innovative crime deterrence measures, and increased liability may well bring about quicker implementation of safety measures. Businesses prosper and profit from patrons, who should be able to demand a safe visit. If the premises are not safe, say victims, the franchise should be held liable for any injuries.

It is clear from a review of the case law in this area that one of the most important factors determining liability is whether the business is located in a "high crime area." If a number of criminal acts have occurred in the vicinity, victims can argue effectively that the franchise operation should have taken steps to protect employees and patrons from injuries, exercising reasonable and ordinary care to make the premises safe for those who enter. If crimes are foreseeable given the circumstances, then the franchise operation has a duty to protect employees and patrons. Recent cases suggest that crime figures in the vicinity of a franchise within the previous three to five years will be important in deciding whether the business should have hired security guards. If there have been prior incidences of criminal activity, even without personal injuries, it can still be asserted that the injuries were foreseeable and should have been prevented. Even in low crime areas, victims will seek to establish that a franchise operation could have done more to prevent or minimize injuries.

Another public policy argument supporting the imposition of broad franchise liability is commonly referred to as the "deep pockets theory." Proponents maintain that a business is better equipped to cover injuries than are the victims. If injured victims are not allowed to recover monetary damages from businesses, they suffer unfairly, whereas a business can spread the cost of liability over the operation and still survive. Placing the burdens of emotional and physical injuries on patrons or employees who inadvertently find themselves in the middle of a robbery is inherently unfair.

As to the assertion that guards will actually increase risk, several courts have concluded that this position has never been verified and that the courts are obligated to decide each case on its individual merits. They maintain that it is up to a jury to decide whether the franchise operation has or has not used reasonable care under the circumstances.

LEGAL LIABILITY OF FRANCHISE OPERATIONS

With policy considerations in mind, it is helpful to discuss and contrast specific case decisions in which the courts have grappled with these sensitive issues. Three theories are commonly used when franchisors and franchisees are sued by victims of criminal activity at a franchise operation: negligence, actual agency relationship, and an apparent agency relationship.

Negligence

Under this theory, the injured crime victim attempts to show that the franchisor and/or franchisee neglected to take reasonable steps to prevent such actions. To recover damages under the tort theory of negligence, a plaintiff must demonstrate a failure of reasonable care under the circumstances, a foreseeable connection between the negligent act and the injuries, and proof of the extent of the damages suffered. In helping to understand this theory, the following two cases can serve as examples, both having resulted in successful lawsuits by crime victims.

Taco Bell v. Lannon. In the 1987 Colorado case described in the beginning, a customer of a company-owned Taco Bell fast food store in Denver was shot during an armed robbery. When he entered the restaurant around 10:30 p.m. and approached the counter to place an order, he noticed that the employees were off to one side of the counter and a man was crouched behind it holding a gun and going through a floor safe. Realizing that a robbery was in process, the customer retreated toward the exit door, where he encountered another robber apparently acting as a lookout man. Brushing past the second robber, he ran out the door into the parking lot. But the robber from behind the counter ran toward the door and shot at him, hitting him on the ring finger of his left hand. The customer then ran to a nearby laundromat and called the police, who arrived at the scene after the robbers had fled.

The plaintiff sued Taco Bell, alleging that the company had a duty to take adequate measures to protect him from criminal acts and that it was negligent in failing to take such measures. Taco Bell responded with two assertions: it had no duty to protect the patron from the criminal acts of third parties, and the patron helped cause his own injuries through his contributory negligence.

The trial court rendered a judgment against Taco Bell in the amount of $40,000, which Taco Bell appealed. In its review of the case, the Colorado Supreme Court held that the proper approach in these cases is to examine the particular facts of each case and determine whether a duty to protect the public exists in that case. Noting that there had been ten armed robberies at the same Taco Bell within the previous three years, the court believed this placed a duty on Taco Bell to take reasonable measures to protect its customers, since criminal acts were foreseeable. The court specifically stated that businesses are not insurers of the safety of customers, but once criminal conduct becomes foreseeable, the duty to protect becomes necessary. Taco Bell had argued that the plaintiff's injuries in this case were not foreseeable because none of the previous robberies had resulted in physical injury to customers. But the Court found this unconvincing, stating that armed robberies "present a significant risk of injury to persons unfortunate enough to be present when one occurs." Therefore, the customer's injury was deemed as foreseeable despite the previous absence of injuries.

A hotly contested issue in this case was whether security guards should have been hired by Taco Bell and whether the presence of security guards would have prevented the injuries. Taco Bell argued that this issue should not have been decided by the jury; the Colorado Supreme Court believed it was proper for the jury to decide the issue. Three Denver police officers testified that security guards were frequently used in "high crime areas," and two of them testified that the robbery probably would not have occurred if armed guards had been present. The court felt this testimony supported the jury's decision, and upheld the $40,000 judgment received by the wounded plaintiff. The court specifically noted that although greater security measures would increase the costs of operation for Taco Bell, such an increase would not be an onerous burden. The store could simply increase its prices to cover the higher costs.

A significant factor in holding this Taco Bell liable for the customer's injuries appeared to be the ten armed robberies that had occurred there in the previous three years. Fewer such incidences may well have affected the outcome of the case. In light of this, franchise operations located in high crime areas or developing crime areas need to review their security procedures carefully.

Martin v. McDonald's Corporation. Another example of a negligence claim is a 1991 Illinois case involving a robbery at a McDonald's restaurant. In this case, one employee was killed and two were injured during the late-night holdup. The McDonald's Corporation had recognized the threat of armed robbery at its franchises and had established an entire corporate division to deal with security problems, which came up with a number of rules and regulations. A regional security officer for McDonald's visited the franchise and recommended that no one carry garbage out the back door after dark, trash should be taken out only through the side door and no later than one hour before closing, and a security system should be installed for the back door. However, the advisor never followed up to see whether his recommendations had been enforced.

Late one evening, a six-woman teenage crew was working to clean up and close the restaurant when a robber appeared at the back door with a gun and ordered the crew to open the safe and give him all the money. He then ordered everyone into the refrigerator. In the course of moving the crew into the refrigerator, one person was shot and killed; two others were assaulted and allegedly suffered emotional distress. The trial court awarded the deceased person's estate $1,003,445 and the two assaulted workers $125,000 each. This judgment was upheld against McDonald's because by developing security measures it had assumed a duty to protect the workers and ensure that the recommended safety measures were implemented. Because the company failed to make sure the security deficiencies were eliminated, it was deemed negligent and responsible for the wrongful death and assault injuries.

Actual Agency Relationship

Under this theory, the plaintiff seeks to establish that the franchisor is so closely involved in the operation of a local franchisee that the latter is actually the agent of the franchisor. In agency law, a principal may be held liable for the careless actions of an agent. An example of this is the case of Greil v. Travelodge International (1994). Travelodge International is a California corporation that operates a national network of motor motels by granting a license to franchisees to use its mark. In this case, the plaintiff was a paying guest at a Chicago Travelodge when a robber broke into his room. To escape the robber, the plaintiff jumped from a second-story window to the sidewalk, sustaining personal injuries for which he later sued the franchisor.

The plaintiff argued that Travelodge was so closely involved in the day-to-day activities of this motel that an agency relationship was created. To support this assertion, the plaintiff showed that Travelodge controlled building specifications and operational procedures, reserving the right to inspect the premises regularly to ensure that all requirements were being met. The franchise agreement between Travelodge and the Chicago operation required the franchisee to maintain a "clean, safe, and orderly operation" as well as the "highest standards of hospitality." In previous inspections, Travelodge had required changes in parking lot lighting and in the door and window locks. Although the appeals court did not indicate whether these suggested changes had been implemented, it did conclude that an agency relationship could be deemed present and sent the case back to the jury for a final decision as to whether an actual agency was created.

The actual agency theory creates significant problems for franchisors, who must exert controls over franchisee activities for a couple of reasons. First, controls are necessary to ensure that the franchisees consistently deliver products or services of high quality. To do this, the franchisor must carefully prescribe how the franchisee is to operate its business activities. Second, the franchisor must control the use of its trademark to protect its rights under the Lanham Act. A lack of adequate control can lead to an abandonment of the trademark. However, such close controls can result in the unwanted outcome of creating an actual agency relationship, meaning the franchisor must be held liable for the actions of its franchisees. Most franchisors have responded with broad controls rather than close supervision involving them in day-to-day activities.

The actual agency theory clearly forces franchisors to walk a tightrope between exerting too much control and not exerting enough. A victim injured by the criminal acts of third parties who cannot show the existence of excessive control can then assert that even if there is no actual agency, there is an apparent agency.

Apparent Agency Relationship

Like the actual agency theory, this theory is also used to attempt to hold a franchisor liable for incidents that occur on local franchisee premises. If customers or patrons are led to believe they are dealing with the franchisor directly, or with an authorized agent of the franchisor, rather than a locally owned operation, then the franchisor can be held liable. The Florida case of Holiday Inns, Inc., v. Shelburne (1991) is illustrative.

Holiday Inn had granted a license to a local business to operate a franchised hotel in Fort Pierce, Florida. A bar located in the hotel, called the Rodeo Bar, was very successful and became known as the "hottest spot in town." Two unarmed security guards were employed, but their main function was to keep the hotel parking lot open for hotel guests and redirect bar patrons to park in vacant lots around the hotel. Fights on the premises and in the parking lots were common; police reports involving 58 offenses had been filed during the previous 18 months. On the night in question, an overflow crowd appeared and two groups exchanged angry words as they were leaving after closing time. As the groups moved toward their vehicles, a fight erupted in which three people were shot and one was killed. The bar was found liable for negligence and Holiday Inn was held liable under the theory that the local operation was the apparent agent of the franchisor. The deceased person's estate received $3,825,000 and the other two victims each received $1,000,000.

On appeal, Holiday Inn argued that it was not responsible for the actions of the local franchisee. But the court disagreed and held the company liable because the patrons had been led to believe that the bar, which used the Holiday Inn logo and made use of the corporation's reservation system, was a company-owned operation. The court held that the actions of the franchisor represented to the public that the particular Holiday Inn in question was part of the national chain of Holiday Inns and that people could find a certain level of service and safety at its hotel and bar. The public believed exactly what Holiday Inn wanted it to believe: that the Fort Pierce hotel and its Rodeo Bar were part of the Holiday Inn system.

HOW CAN FRANCHISE OPERATIONS OPERATE AVOID LIABILITY?

In our litigious society, it is clear that franchises need to be looking constantly for safer ways of doing business. Once a patron has been victimized, the legal system will critically view the acts of both the franchisor and franchisee. Certain steps can be taken to attempt to minimize legal liability.

Avoiding Negligence Claims

Franchisors and franchisees must take reasonable precautions. Some of these can be implemented without great costs; others can significantly increase overhead expenses. Some common sense activities include keeping the business premises well illuminated, installing highly visible video cameras, keeping small amounts of cash in the registers, posting signs notifying potential robbers of the small amount of cash in the registers, training employees in methods for dealing with in-progress robberies, and locking non-public entrances during nighttime hours. Simple precautions at closing time appear crucial: garbage should have been taken out several hours before; all doors should be secured; and sufficient workers should be present. Contacting police to come in to discuss proper procedures is helpful. Franchisees need to be directed to meet regularly with employees to review security measures and techniques. Implementing these types of security measures will help in establishing that the franchise operation did act reasonably in the course of a criminal act. If reasonableness can be established, a lawsuit based on a negligence claim will almost certainly fail.

The most perplexing decision for franchise operations will certainly be deciding whether or not to retain security guards. If a significant number of armed robberies have occurred at the business or in the immediate vicinity within the last few years, there will be significant pressure to retain security guards, thereby upping the costs of operation. Moreover, it is important to note that merely hiring a guard will not ensure freedom from liability for victims who are injured. The franchisee can still be held liable if the security guard acts improperly. The hope is that criminals will simply not want to attempt a robbery at a guarded franchise.

Advice Specifically for Franchisors

To avoid liability under the actual agency theory, franchisors need to implement broad reins but should seek to refrain from controlling day-to-day activities. To run an effective franchise operation, clearly consistent quality must be maintained. Few franchises will flourish if some operations are run well and others offer far inferior products or services.

All franchise operations should be required to have in place conspicuous signs indicating local ownership. Franchisors should be emphatic about this requirement. Such a disclosure will probably have little or no negative impact on potential customers. Patrons generally do not refuse to do business with a franchise operation simply because it is not franchisor-owned. If national directories are published by franchisors, the publication should clearly indicate which of its operations are locally owned. A crucial factor in most of the apparent agency cases has been the fact that national directories were published that failed to indicate this.

Above all, franchisors must not ignore statistics indicating that franchise operations are in high crime districts. They must invest time and energy in developing crime reduction techniques to assist the franchisees. Once again, this could be deemed involvement in day-to-day affairs, giving rise to actual agency claims. On the other hand, it would appear to be clear negligence not to develop at least minimal crime prevention policies.

Franchises are crucial to the economy of our country. The viability of the format must be protected and fostered. However, patrons and employees deserve to be protected from injury, and franchise operations must foster as safe an environment as possible. One of the thorny topics for both the legal system and franchises heading into the next century will be whether private operations will be forced to move into the police function of crime prevention. At this point, it remains unclear whether such a move would really be effective in creating a safer environment.

The fear of litigation may well result in placing security guards in every franchise. For the time being, it appears to be a wise move to hire security guards in high crime districts. Future legal decisions will dictate how quickly this happens. Fifteen years ago no one would have predicted that police would walk the halls of public schools today. But this has now become the norm, at least in urban schools. Perhaps McDonald's University will soon create its own "Security Guard Division" to train its own guard force to be sent out to franchise operations throughout the United States.

References

International Franchise Association (IFA) Education Foundation, "Franchising in the Economy," http://www.franchise.org/(1996).

Greil v. Travelodge International, 541 N.E.2d 1288 (1994).

Holiday Inns. v. Shelburne, 576 So.2d 322 (1991).

Martin v. McDonald's Corp., 572 N.E.2d 1073 (1991).

Taco Bell v. Lannon, 744 P. 2d 43 (1987).

Randall K. Hanson is a professor of business law at the University of North Carolina at Wilmington. He wishes to acknowledge funding for his research from the Cameron School of Business Administration Summer Research fund at UNC-Wilmington.
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Author:Hanson, Randall K.
Publication:Business Horizons
Date:Jul 1, 1998
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