Manufacturer Not Liable for Seller's Alleged False Advertising of Products

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

Taiwanese bicycle component manufacturer Tien Hsin was not directly or vicariously liable under the Lanham Act or Washington law for allegedly false advertising by a separate corporation (FSA)—whose trademark was held by the manufacturer—that sold Tien Hsin's products to North American distributors and retailers, the federal district court in Seattle has ruled.

Direct Liability

A competing seller's direct liability theory was rejected because none of Tien Hsin's employees contributed to, commissioned, reviewed, or participated in the creation of FSA's advertisements. There was no evidence that Tien Hsin had knowledge of the advertisements, or more importantly of their falsity, the court found.

Vicarious Liability

The competitor asserted vicarious liability on grounds that FSA was Tien Hsin's alter ego and agent. The relationship between the two was akin to a subsidiary-parent relationship, the court said. At least at a high level, Tien Hsin had the power to control FSA because it supplied substantially all the products FSA sold and owned the FSA trademark. FSA was wholly owned by one of Tien Hsin's four shareholders who was related through marriage to the other three shareholders.

Parent/Subsidiary Relationship

However, a parent corporation generally is not liable for acts of its subsidiary, the court observed. There was no evidence that the corporate formalities were disregarded. The close relationship between the two firms was not grounds for an alter ego finding.

To hold a parent firm liable on an agency theory would require that the parent exercise total control over the subsidiary. The control that Tien Tsin was able to exercise because of trademark ownership, stock ownership, and near sole supplier status did not rise to the level of total domination that could justify holding it liable for torts committed by a separately incorporated entity, the court concluded.

The decision is Campagnolo S.R.L. v. Full Speed Ahead, Inc., CCH Advertising Law Guide ¶63,897.

Hotel Franchisor Not Liable for Patrons’ Contracting of Disease at Franchise

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

A hotel franchisor that never voluntarily took on the task of maintaining the pool and spa at a franchised hotel was not directly or vicariously liable for hotel patrons’ alleged contracting of Legionnaires Disease, a federal district court in Springfield, Illinois, has decided.

Accordingly, the franchisor was entitled to summary judgment on the patrons’ claims based on an alleged duty of the franchisor to maintain the pool and spa (negligence, wrongful death, and two statutory claims) and on the claims based on the theory of apparent agency.

Negligence

It was clear that the franchise agreement did not create a duty on the part of the franchisor toward the patrons of the hotel, the court held. The franchisee owned the hotel, and the franchisor neither owned nor operated the hotel. The agreement specifically provided that the franchisee was an independent contractor. However, the face of the agreement was not controlling on the issue of duty, the court observed.

A franchisor must make sure that the franchisee maintained the required level of quality associated with the franchised brand in order to protect its trademarks. This monitoring could include setting standards for the operation of the franchise, retaining the right to inspect the franchise operation periodically, and retaining the right to withdraw the franchise or to close an aspect of the franchise operation for failure to comply with the franchisor’s standards.

A franchisor would not be responsible for the operation of a franchised hotel unless it asserted more direct control than these limited rights associated with maintaining the quality of its brand, according to the court.

The complaining patrons presented no evidence that the franchisor went beyond the limited steps necessary to maintain the level of quality associated its brand, the court determined. The franchisor made visual inspections of the pool and spa area twice a year at most and retained the right to close the pool and spa if the water was cloudy.

The franchisor also required, in its Rules and Regulations, that the hotel comply with the law. However, the franchisee had to meet these requirements anyway. The franchisor did not exercise sufficient control over the hotel to be considered an operator of the hotel.

Apparent Agency

To support an apparent agency theory of liability, the patrons presented evidence that one of the affected individuals believed that the franchisor operated the hotel. She testified that she believed this based on the franchisor’s commercial she saw on television.

The patrons also presented evidence that the franchisor operated a reservation system that used an "800" telephone number and an Internet website. Moreover, the franchisor operated a frequent traveler program in which customers could accumulate points that would entitle them to a free night’s stay at a participating franchise. However, none of that evidence
demonstrated that the franchisor held out the franchisee as its agent, the court ruled.

The use of the brand name showed a franchise relationship, but the existence of a franchise did not create an agency. In fact, the only evidence of representations regarding the relationship between the franchisor and the franchisee were the parties’ repeated disclaimers of any agency: the plaque in the lobby of the hotel that declared that the hotel was independently owned and operated, and a disclaimer on the franchisor’s website and in its directory, according to the court.

The decision is Braucher v. Swagat Group, LLC, CCH Business Franchise Guide ¶14,355