Out Of Control – Franchisor Not Liable For Franchisee’s Negligence

Royal Dispatch Services, Inc. operates a vehicle dispatch service franchise that receives calls from customers and refers them to its franchised drivers through a computer system Royal requires the franchisees to purchase or lease from Royal. Under Royal’s franchise agreement, franchisees may use Royal’s name, signage and trademarks, must purchase late model Lincoln town cars, must service and maintain the vehicles at their own expense, must pay for their own insurance and must acquire and maintain all necessary licenses. Royal collects the livery charges from the franchisees’ customers, retains approximately 20% in commissions for itself, and pays the franchisees when they redeem vouchers they have received from passengers. Franchisees may accept or decline passenger referrals from Royal, choose their own routes and accept passengers from other dispatch companies. While Royal requires its franchisees to abide by the vehicle maintenance, dress and conduct standards prescribed in its “Rule Book,” Royal does not discipline its franchisees if they do not do so. Rather, the “Rule Book” provides that franchisees may be fined by the decision of a committee of franchisees.

Kaykov entered into a franchise agreement with Royal in 2000. In 2007, Kaykov accepted a dispatch from Royal to pick up Leach in New York City. During the trip, Kaykov struck a construction vehicle in New Jersey that was operated by Fletcher, injuring Leach. Leach sued Kaykov, Royal and Fletcher and prevailed at trial against Kaykov and Fletcher, but not against Royal. Fletcher later sued Royal claiming Royal, as Kaykov’s franchisor, was vicariously liable for Kaykov’s negligence despite language in the franchise agreement that established an independent contractor relationship between Royal and Kaykov and stated that Kaykov was “not deemed to be an employee or agent of Royal.” Under New Jersey law, an independent contractor relationship is characterized by “attributes of self-employment and self-determination in the economic and professional sense.”

The court rejected Fletcher’s vicarious liability claim and decided the case in Royal’s favor. The court held that Kaykov was operating his own enterprise as a franchisee and independent contractor of Royal, and that regardless of the authority that Royal commanded under the franchise agreement, Royal had no control over the manner and means in which Kaykov performed under the franchise agreement. Although Kaykov failed to properly control his vehicle, he exercised self-determination in the manner in which he performed.

Leach v. Kaykov showcases the value of the liability protection franchisors enjoy from the independent contractor relationships established in well drafted franchise agreements.

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