Denny’s Could Be Liable for Attack on Franchise Patron

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

Under California law, the franchisor of Denny’s restaurants and several affiliated corporate entities could have been liable under a theory of ostensible agency for the injuries a patron of a franchised restaurant sustained in a beating by a group of street gang members and associates who "took over" the franchisee’s Denny’s restaurant most Saturday nights over a period of two years, a California appellate court has held.

There were three requirements necessary before recovery could be had against a principal for the act of an ostensible agent under California law:

(1) The person dealing with the agent must do so with belief in the agent’s authority and this belief must be a reasonable one;

(2) Such belief must be generated by some act or neglect of the principal sought to be charged; and

(3) The third person in relying on the agent’s apparent authority must not be guilty of negligence.

The franchise agreement specified that the franchisee was an independent contractor. However, it did give the franchisor some control over the franchisee’s business practices, including vendors, uniforms, menus, signs, and advertising. The agreement required the franchisee to keep the restaurant open 24 hours a day, seven days a week. But the franchisor allowed individual franchisees to deviate from this requirement if a risk assessment showed above-normal criminal activity during late-night hours. Some 15 restaurants nationwide had been allowed to close during the late-night "bar rush" period when the patron’s injuries were sustained, the court noted.

The franchisee was required to comply with the Denny’s Brand Standards Manual, and this manual gave one of the Denny’s entities other than the franchisor some control over the franchisee’s business practices, the court determined.

The franchisee did business as "Denny’s," using the Denny’s name, logo, and other trademarks. While some Denny’s restaurants were franchisee-operated, others were corporate-operated. Thus, it was not common knowledge that all Denny’s were necessarily franchises, according to the court.

There was no signage or other indication that the particular Denny’s was actually operated by a franchisee. Moreover, the injured patron testified that he had seen advertisements identifying Denny’s as "a family style restaurant…in which a patron could enjoy a good meal in a friendly, safe, and secure environment" and that this led him to conclude that he and his friends could enjoy a meal at the particular location. These statements were sufficient evidence of reliance, the court ruled.

The Denny’s entities did not even argue that ostensible agency did not apply, the court commented. However, they did raise the following policy argument: "[I]f the law ultimately holds franchisors routinely liable for the wrongful acts of its franchisees and their employees, franchisors will either quit franchising or, at the very least, charge much higher fees." A similar argument had already been rejected by a California appellate court and was rejected here.

The decision is Ford v. Palmden Restaurants, LLC, CCH Business Franchise Guide ¶14,877.

Lost Future Royalties—Pundits Were Wrong; Sealy Not Dead

This posting was written by Bruce S. Schaeffer of Franchise Valuations, Ltd., co-author of CCH Franchise Regulation and Damages.

When the case of Radisson Hotels International, Inc. v. Majestic Towers, Inc. (CCH Business Franchise Guide ¶13,680) was decided in 2007, many claimed that the holding of Postal Instant Press, Inc. v. Sealy (CCH Business Franchise Guide ¶10,893)—that lost future royalties claims would not be allowed where the franchisor terminated the franchisee—was dead.

But as Mark Twain (and this author) said, perhaps the rumors of Sealy's demise were premature. Several recent decisions following Sealy have come down recently.(See e.g. Meineke Car Care Centers, Inc. v. RLB Holdings (W.D. N.C. 2009) CCH Business Franchise Guide ¶14,212; Meineke Car Care Centers, Inc. v. L.A.C. 1603, LLC (W.D. N.C. 2008) 2008 U. S. Dist. LEXIS 33566; and Meineke Car Care Centers, Inc. v. Duvall (W.D. N.C. 2007) 2007 U. S. Dist. LEXIS 27120).

In the recent case of Meineke Car Care Centers, Inc. v. RLB Holdings, (CCH Business Franchise Guide ¶14,212), the argument accepted in Radisson (that it took the franchisor a time certain to find a replacement franchisee) was specifically rejected with the court finding that Meineke's "generic calculation for lost profits based on the CFO's claim that it usually takes two to three years to re-franchise a location" was either irrelevant or not believed. All claims for lost future royalties were denied.

The court also noted that Meineke admitted that it typically did not try to refranchise a shop once it had closed, and there was no evidence that it had done so in this case in an attempt to mitigate damages.

Shaggy Dog Story—Hotel Franchisor Not Liable for Franchisee's Alleged Negligence

Here's a beauty: A hotel franchisor was held not vicariously liable for a franchisee's alleged negligence and violation of the California Unruh Civil Rights Act in connection with an incident at the franchisee's hotel during which an individual was denied accommodations. There was no evidence that the franchisee and its employees were actual or ostensible agents of the franchisor, a California appellate court has decided.

The plaintiff arrived at the hotel with his allegedly disabled cousin and a dog. The plaintiff's cousin declared that he had a form of muscular dystrophy and used the dog to help him maintain mobility. As the incident was recalled by the hotel's desk clerk, a big, unleashed dog walked into the hotel, "just roaming through the lobby," sniffing the hotel's clientele.

According to the clerk, the dog was not wearing anything that would indicate that it was a service dog. The plaintiff, wearing only swim trunks and smelling strongly of alcohol, then proceeded to cut in front of the line at the hotel service desk, butting aside a client that the clerk was assisting. He claimed that the dog was a service animal, and became angry and uttered obscenities when the clerk asked him to leash the dog. The clerk later told the manager that he refused to rent a room to the individual because he was "drunk and surly."

The decision is Stites v. Hilton Hotels Corp., CCH Business Franchise Guide ¶14,296.

Expert Witnesses—Testimony of New Expert Limited to First Expert's Report

In a contest between two sandwich shop franchisors (Subway and Quiznos), Subway was permitted to substitute a new expert for its originally-disclosed expert witness. However, the court ruled that the substitute's testimony at trial would be limited to establishing the veracity and integrity of the original expert witness and the conclusions reached in the original witness' expert report.

The substitute's opinion, which sought additional damages, would not be permitted in evidence. Therefore, Quiznos' motion seeking costs and expenses incurred to rebut the damages analysis of Subway's original damages expert was denied.

The decision is Doctor's Associates, Inc. v. QIP Holder LLC (D. Conn. 2009) CCH Business Franchise Guide ¶14,289.

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Additional information on the issues discussed above is available in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.