Focus on Business and Corporate Law: Is There a Fiduciary Relationship Between Franchisor and Franc

March 01, 2004

In franchise litigation, it is not uncommon for franchisees to argue that a fiduciary relationship exists between them and their franchisors. Such an argument is most often advanced in an attempt to impose upon the franchisor duties that do not appear in the franchise agreement, including unwritten disclosure obligations in connection with the sale of the franchise. A fiduciary duty requires the fiduciary to act with “the highest kind of loyalty”1 and, generally speaking, does not result from an arms-length business relationship. Applying that principle, the Appellate Division, Second Department,2 as well as the vast majority of state and federal courts, have held that a franchise relationship generally is not fiduciary in nature. Recently, two Nassau Supreme Court judges reached the same conclusion.

In Ahmed v. Getty Petroleum Marketing Inc.,3 a franchisee asserted claims relating to the franchisor’s alleged failure to disclose information to her and for fraudulently inducing her to enter into a franchise agreement for an unprofitable service station. Justice Burton S. Joseph dismissed the action. Addressing the claim for breach of fiduciary duty, the Court reiterated the general New York rule as follows:

In support of this claim, Ahmed relies solely on the theory that “a franchisor is in the capacity of a quasi fiduciary in its relationship with its franchisee,” Ms. Ahmed herein. New York courts, however, have specifically rejected that proposition. In this case, there is nothing in the complaint which indicates the existence of a fiduciary relationship with Ahmed. The relationship between her and Getty was purely an arms-length business relationship. In the absence of a special relationship between two parties to a contract, no duty to disclose exists.4

Even more recently, in DiDomenico, et al. v. Long Beach Plaza Corp., et al.,5 Justice Zelda Jonas dismissed a franchisee’s claim for breach of fiduciary duty against Carvel Corporation and a related company. The action involved allegations of environmental contamination at a shopping center at which a Carvel ice cream store was located. In dismissing the breach of fiduciary duty claim, the Court made clear that “there is no fiduciary relationship between a franchisee and franchisor. The relationship between plaintiffs and Carvel defendants was purely an arms-length business relationship.”6

Like any general rule, however, there are exceptions to this one, and a distinct minority of courts have found that a fiduciary relationship exists between a franchisor and franchisee. The only reported New York case to do so, however, has been limited to its facts by virtually every court that has analyzed it. In Sbarro Holding, Inc. v. Yuan,7 the plaintiff entered into a franchise agreement with a family of Taiwanese immigrants who had no business background.8 The court described the relationship between the two parties as “awesome. . . . Sbarro’s representatives convinced their franchisees there was nothing to worry about, Sbarro would handle all.”9 The court further noted that the franchisor had served as the “developer, architect, builder, lawyer, supplier and guidance counselor” to the franchisees.10 Importantly, the franchisees in Sbarro, recent immigrants, “had no legal counsel and apparently were discouraged by Sbarro officials from seeking independent legal advice.”11 In those extraordinary circumstances, the court found that a fiduciary relationship existed between the parties.

The court’s conclusion in that regard appears to be merely dictum, however, inasmuch as the issue before the court was whether an arbitration proceeding should be stayed as against the petitioner, a Sbarro entity, on the grounds that a different Sbarro entity had entered into the arbitration agreement with the respondents.12 The court held that the petitioner could be compelled to arbitrate by reason of the interrelation between the various Sbarro entities, as well as the special relationship that existed between those entities and the respondents.13

In any event, the Sbarro case has been limited to its facts by every court that has analyzed it. Indeed, research has not disclosed a single New York case following Sbarro. For example, two New York federal cases, McDonald’s Corp. v. Hinksman14 and Adiel v. Coca-Cola Bottling Co. of N.Y., Inc.,15 recognized Sbarro as representing a limited exception to the general New York rule. However, neither case found the exception applicable. Likewise, in Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc.,16 a federal judge dismissed the franchisee’s claim for breach of fiduciary duty. The Fashion Boutique court discussed Sbarro, noting that “[o]ther than this exceptional case, New York courts have not found the franchisor-franchisee relationship to be a fiduciary one.”17 In addition, the court cited numerous New York federal cases, as well as authority from other jurisdictions, concluding that “[f]ederal courts interpreting New York law have also held that a franchisee has no claim for breach of fiduciary duty against a franchisor” and that the “‘vast majority’ of federal and state courts in other jurisdictions have held that the existence of a franchise agreement does not give rise to a fiduciary duty.”18

The franchisor-franchisee relationship, borne out of a franchise agreement, is an arms-length business relationship. It is contractual in nature. As such, the rights and responsibilities of the parties are, or should be, clearly spelled out in the franchise agreement and applicable statutory law. The general New York rule clarifies these principles, serving to remove from the equation questions regarding common law duties not contemplated by the parties themselves or included in their written agreement.

Eric W. Penzer is associated with the firm of Farrell Fritz, P.C. and is a member of the Nassau County Bar Association’s Commercial Litigation Committee.

1. Bardach v. Chain Bakers, 265 A.D. 24, 27, 37 N.Y.S.2d 584, 587 (1st Dept. 1942).

2. See, e.g., Marcella & Co., Inc. v. Avon Prods., Inc., 282 A.D.2d 718, 719, 724 N.Y.S.2d 192, 193 (2d Dept. 2001); Bevilacque v. Ford Motor Co., 125 A.D.2d 516, 519, 509 N.Y.S.2d 595, 599 (2d Dept. 1986).

3. Index No. 20207/2002, 2003 WL 21262131 (Sup. Ct. Nassau Co. May 14, 2003) (citations and quotation marks omitted).

4. Id. at *3.

5. Index No. 03-003020 (Sup. Ct. Nassau Co. Oct. 28, 2003). Farrell Fritz, P.C., represented Carvel Corporation and a related company in the DiDomenico action.

6. Id. at 3 (citations omitted).

7. 111 Misc. 2d 910, 445 N.Y.S.2d 911 (Sup. Ct. Kings Co. 1981), aff’d on other grounds, 91 A.D.2d 613, 456 N.Y.S.2d 416 (2d Dept 1982)

8. See, 111 Misc. 2d at 911, 445 N.Y.S.2d at 912.

9. Id. at 913, 445 N.Y.S.2d at 914.

10. Id.

11. Id. at 912; 445 N.Y.S.2d at 913.

12. Id. at 910, 445 N.Y.S.2d at 912.

13. Id. at 914, 445 N.Y.S.2d at 914.

14. No. Civ.A.92-CV-3187 (DGT), 1999 WL 441468 (E.D.N.Y. May 28, 1999).

15. 95 CIV. 0725 (WK), 1995 WL 542432 (S.D.N.Y. Sept. 13, 1995).

16. No. 91 CIV. 4544 (MGC), 1992 WL 170559 (S.D.N.Y. July 2, 1992).

17. Id. at *6.

18. Id.

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