The Operations Manual is one of the most critical documents in defining and protecting the Franchisor – Franchisee relationship. It functions as a road map of a Franchisor’s entire system, houses trade secrets and governs much of the working relationship with Franchisees. In essence, it is the glue of the entire franchise system. Yet the Operations Manual is often the last document to be developed by the Franchisor and is too often an after-thought with the Franchisor rushing to get the Manual completed in order to start selling franchises. In fact, Franchisors are often in such a rush to start selling their franchise that they fail to have legal counsel review the Manual before releasing it to prospective Franchisees.
For the Franchisor that fails to consider the legal implications that arise from the content of their Operations Manual, the trap is set and the franchise company becomes unprotected prey for the hungry plaintiff’s lawyer.
To escape the liability trap Franchisors should have their legal counsel review, at a minimum, the following areas:
1. Modifications to the System. – Franchisors typically implement system changes through their Operations Manual. However, if the Franchise Agreement fails to give a Franchisor authority to make changes to the franchise system a Franchisor’s discretion to make any change is severely limited, if available at all. Without the authority in its Franchise Agreement, McDonald’s could not have modified its system to include breakfast, nor required Franchisees to make a major investment in equipment, advertising, labor cost and additional training.
2. Independent Contractor Standards. – There is a fine line between that of a Franchisee “Independent Contractor” and an employee. Courts often look to the Operations Manual to determine the level of control exercised by the Franchisor over the Franchisee. In court decisions out of Massachusetts and California last year, the court found that the “franchisees” of Coverall of North America and Jani-King were actually employees.
3. Vicarious Liability. – The degree of control that a Franchisor exercises over the day-to-day operation of the franchise is critical in determining whether the Franchisor will be found liable for the actionable conduct of its Franchisees. Evidence of the required control is sometimes found in the Franchisor’s own Operations Manual.
4. Deficient Manuals. Courts have found Franchisor liability where the Manual was either not delivered at all, not delivered timely or not updated. Does your Operations Manual open the door to an imaginative trial lawyer that looks upon the disclosures in your Federal Disclosure Document and your Franchise Agreement relating to the Operations Manual, as a tool to convince the jury that the Manual given the Franchisee is deficient or not properly updated, supplemental or revised?
5. Discrimination Laws. – Title VII of the Civil Rights Act prohibits discrimination in any aspect of employment. The power of a Franchisor to control operations should be reviewed as a possible liability issue as set forth in your manuals.
6. Good Faith and Fair Dealing. – Many states impose an “implied covenant of good faith and fair dealing” on Franchisors in their relationship with Franchisees. The “implied covenant” is often used to measure the propriety of a Franchisor’s use of discretion. Courts will look at a Franchisor’s exercise of discretion under the implied covenant to see if it was reasonable, proper and made in good faith. If the Franchise Agreement gives the Franchisor discretion to make changes to system standards and the Operations Manual provides a basis for dealing with Franchisees in conjunction with Franchisor’s discretion, the Franchisor’s reasonable exercise of its rights should withstand scrutiny by the courts. If not, liability may arise from claims made by dissatisfied Franchisees.
7. Environmental Laws. – Franchisors may be found liable for negligent advice contained in the Operations Manual concerning environmental issues.
8. Anti-Trust Liability. – Pricing information in the Operations Manual has been used by courts to find antitrust liability.
9. Copyright. – For the new Franchisor that outsources the Operations Manual, be careful, the company you hired to put the Manual together often keeps ownership rights to the copyright. The owner of the copyright has exclusive authority to authorize reproduction and distribution of the Manual, not the Franchisor.
A well drafted Operations Manual which includes a proper legal review serves as the key ingredient of a successful franchise by: 1) protecting a Franchisor’s brand; 2) acting as a tool for training; 3) serving as the reference for required performance, standards, developments and source for updating the franchise system; and 4) insuring system compliance. A poorly drafted Operations Manual without legal review may serve as the liability hammer in a hungry trial lawyer’s tool box.