Franchisor and Franchisee as Joint-Defendants; What to do When You’ve Been Roped into Your Franchisee’s Litigation and Can’t Get Out.

Franchisor and Franchisee as Joint-Defendants; What to do When You’ve Been Roped into Your Franchisee’s Litigation and Can’t Get Out.

 

This scenario is familiar to most franchisors.  Your franchisee has been sued and you have been  namedas a defendant because you have deeper pockets.  Unfortunately, the court will not let you out on a motion to dismiss and you are stuck engaging in the excruciating exercise of discovery and possibly trial in a matter you had nothing to do with.  You and your franchisee have an independent contractor relationship!

 

Although it is frustrating, costly and distracting to be involved in the litigation, there are several considerations to carefully weigh so that your interests are protected, to reduce costs and/or to encourage early settlement.

 

  1. Indemnification:Your franchise agreement likely (and should) contain a provision that requires your franchisee to indemnify you and hold you harmless. The indemnification provision often serves as a good incentive for the franchisee to settle the claim early so as to avoid paying your fees and costs.  Additionally, explaining the franchise relationship,as well as the franchisee’s obligation to indemnify you, to plaintiff’s attorney often serves as a reality check (hopefully) to the plaintiff’s attorney that litigation against you, due to the franchisee’s indemnification obligations, is only depleting the franchisee’s settlement funds.

 

  1. Insurance Coverage: Your franchise agreement likely (and should) contain a provision that requires your franchisees to maintain a minimum level of insurance and that you be named as an additional insured on each policy.  Accordingly, if the claims against the franchisee are covered, the claims against you should be similarly covered.  The downside to demanding coverage under the franchisee’s policy is that your franchise counsel loses control of the case and insurance counsel may not be in tune with your particular needs and concerns related to the litigation.

 

  1. Joint Representation: You may consider requesting that your franchise counsel represent both you and the franchisee.  Such joint representation raises a number of concerns, as your interests and the franchisee’s interests in the litigation will not always be in line.  Your objective is to be dismissed from the case as soon as possible.  Thus, before offering to jointly represent a franchisee, you and your counsel should carefully consider all of the advantages and disadvantages to joint representation.

 

  1. Joint Defense Agreements: If you and the franchisee are working together on a joint defense strategy, you should consider entering into a joint defense agreement.  Joint defense agreements are useful because communications between your counsel and franchisee’s counsel are not privileged.  By entering into a joint defense agreement with the franchisee, certain communications with franchisee’s counsel will be considered privileged and will not be subject to discovery by the plaintiff.

 

These are just a few of the issues to consider when you have been sued along-side your franchisee.  It is important to discuss each of these items with your counsel at the start of litigation so that your interests are fully protected.  How you will proceed will vary based on the circumstances.

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