Judged by the company you keep: Rhode Island says out-of-state franchisor can be held liable for misconduct at franchisee's business

September 28, 2015

Franchise & Employment Law Alert

Author(s): Jeffrey S. Brenner, Steven M. Richard

Can an out-of-state franchisor be held liable for alleged harassment of a franchisee’s employee occurring at a franchisee’s place of business? A Rhode Island court recently determined that a franchisor could be liable, which may have serious implications for employers and franchisors.

In a 57-page decision issued in September 2015, the Rhode Island Superior Court (Sarah Taft-Carter, J.) held in Korsak v. Honey Dew Associates, Inc., C.A. No. P.C. 2013-0105, 2015 R.I. Super. LEXIS 120 (September 15, 2015), that a Massachusetts-based franchisor would not be dismissed from a lawsuit in which an employee at a donut shop in Rhode Island was allegedly sexually harassed and discriminated against by the franchisee’s security service vendor at the donut shop. Although the superior court noted that the mere presence of franchisees within a state does not subject a franchisor to the jurisdiction of that state’s courts, it held that if a “sufficient relationship” exists between the franchisee and franchisor, the contacts of the franchisee may be imputed to the franchisor.

In Korsak, the superior court explained that the plaintiff alleged that John Frigault repeatedly attempted to initiate unwarranted romantic and sexual advances when he was present at the Honey Dew donut shop where she worked. Mr. Frigault is the president and owner of Applied Security Technologies, and his presence at the donut shop was multi-faceted. First, the franchisor retained Mr. Frigault to perform “secret shopper” operations at all of its stores franchise-wide. Second, the franchisor recommended Mr. Frigault to all of its Rhode Island franchisees. Third, the franchisor’s sub-franchisor authorized Mr. Frigault to conduct “mini visitations” and “tape reviews” at all of its stores. Fourth, the management company for the sub-franchisor hired Mr. Frigault to perform “secret shopper” operations at all of its stores, including the donut shop at issue. Finally, the franchisee hired Mr. Frigault to perform “tape reviews.”

The employee filed suit under the Rhode Island Civil rights Act, a broadly interpreted statute designed to protect employees against discrimination in the terms, conditions and benefits of their employment relationship. The superior court noted that the plaintiff believed that Mr. Frigault was either an agent or employee of the franchisor, and this “belief was only reinforced by the fact that [p]laintiff observed Mr. Frigault ‘fire people, . . . come in and do tape reviews, [and] . . .  eat and drink whatever he wanted without paying.’” The superior court also commented that even the individual responsible at the sub-franchisor’s management company for operating the stores, conducting “shop visitations,” and investigating the franchisees’ compliance with the franchisor’s standards testified that if she saw Mr. Frigault at the donut shop at issue, that “she would not know whether he was performing a secret shopper operation or a mini inspection or for whom he was working.”

Given Mr. Frigault’s multiple roles for the franchisor, the sub-franchisor, the sub-franchisor’s management company and the franchisee, the superior court could have ended its analysis there when it denied the franchisor’s motion to dismiss for lack of personal jurisdiction and the franchisor’s and sub-franchisor’s joint motion for summary judgment. The superior court, however, expanded its analysis to hold that specific personal jurisdiction existed because (1) the franchisor exercised a significant degree of control over the franchisee via its sub-franchisor; (2) the license agreement between the franchisor and sub-franchisor provided that the franchisor had the right to reject a prospective franchisee; (3) the sub-franchisor used a standard franchise agreement which mirrored the franchisor’s franchise agreements; (4) the franchisor could terminate the license agreement if the sub-franchisor failed to hold all franchisees in compliance with their respective franchise agreements; (5) the franchisee agreed to “allow representatives of [the franchisor and/or the sub-franchisor] upon the [p]remises during the regular business hours, without prior notice, for the purposes of inspection”; and (6) the franchise agreement entered between the sub-franchisor and the franchisee provided that the franchisee shall “strictly adhere to the provisions of [the franchisor’s] operational excellence procedure manual” which provides “mandatory guidelines as to all aspects of shop operations.” Therefore, the superior court held that the franchisee was a sub-agent of the franchisor so there was a sufficient relationship between the franchisor and franchisee to subject the franchisor to long-arm jurisdiction in Rhode Island.

The Korsak decision is significant because it represents the first reported case in which a Rhode Island court has expanded potential liability to a franchisor for conduct occurring at the franchisee’s shop for which the franchisee exercised exclusive control. Most troubling for franchisors is the superior court’s focus on typical franchisor-franchisee interactions as a justification to hold that the franchisee functions as an agent of the franchisor. Although it is not known at this time whether Korsak will settle or go to trial, not to mention whether the superior court’s decision will be appealed once final judgment enters after trial, the employee-plaintiff’s bar in Rhode Island has already trumpeted this decision and has vowed to expand their claims to include franchisors when suing franchisees for workplace harassment cases.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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