1. Krispy Kreme Franchisor Liability Memorandum
To: Demanding Partner
From: Adam Anderson
Re: Franchise Agreement
Question Presented
This memorandum is intended to examine the following aspects of Krispy Kreme’s draft
franchise agreement: 1) What provisions could potentially expose them to liability for acts of the
franchisee? 2) How could the form be modified to more effectively mitigate such risk? 3) What
provisions of the agreement are particularly effective in insulating Krispy Kreme from liability
for acts of the franchisee?
In answering these questions it is important to establish the general rules and standards a
court uses in imposing liability in the franchisor/franchisee relationship. This memorandum will
first explore these rules and standards concerning liability and the avenues most often used in
imposing them upon a franchisor. I will then apply the rules to the document at hand and discuss
the specific provisions that most readily place Krispy Kreme at risk of liability. Finally, I will
examine the provisions that best insulate Krispy Kreme from liability and suggest alterations to
the form that I feel could further mitigate the risk thereof.
Applicable Rules
A franchisor is subject to vicarious liability for the acts of the franchisee if it can be
shown that an agency or apparent agency relationship exists between the two. Through a

2. thorough examination of relevant case law I have established the following principals governing
the existence of agency and apparent agency relationships.
Three elements must be established in order to create an actual agency relationship: 1)
there must be mutual consent (either express or implied) between agent and principal; 2) the
agent must be subject to control by the principal; 3) there must be some agreement that the agent
acts on behalf of the principal. In franchise agreements the element of control is especially
crucial in establishing an agency relationship. In analyzing the control element the Court will
seek to determine whether the franchisor had the “right to control both the means and details of
the process by which the franchisee was to complete his task.” In re Caroline Paxson
Advertising, Inc., 938 F.2d 595, 598 (5th Cir. 1991). This doesn’t mean a franchisor can’t
impose mandatory standards on their franchisees. Specific standards may be imposed so long as
they are “not intended as a means to control the time, manner and method of performing the
daily operations of the franchise, but as a means of achieving a certain level of quality and
uniformity within the system.” McGuire v. Radisson Hotels, Intl., 209 Ga. App. 459 (1), 486
S.E.2d 684, 742 (1987). Under some unique circumstances court’s have found the existence of
an actual agency relationship between franchisor and franchisee, however, due to agency’s more
rigid requirements of either express or implied mutual consent and sufficient control, it is more
common for a court to impose liability based on the theory of apparent agency.
Apparent agency refers to “that authority which a principal holds his agent out as
possessing or permits him to exercise or to represent himself as possessing, under such
circumstances as to estop the principal from denying its existence." Nevada Power Co. v.
Monsanto Co., 1994 U.S. Dist. LEXIS 20504, 12-13 (D. Nev. Nov. 9, 1994). An apparent
agency relationship can be established if a franchisor, either through its action or inaction, leads

3. a third party to reasonably believe a franchisee is acting as its agent, or that in conducting
business with the franchisee, they are dealing directly with the franchisor. If the third party
reasonably relies on the misrepresentation to their detriment, the franchisor can be held
vicariously liable for the damaging acts of the franchisee. In O’banner v. Mcdonalds Corp. the
court outlined the elements of apparent agency as follows: “(1) the principal's consent to or
knowing acquiescence in the agent's exercise of authority, (2) the third party's knowledge of the
facts and good-faith belief that the agent possessed authority, and (3) the third party's detrimental
reliance on the agent's authority.” O'Banner v. McDonald's Corp., 273 Ill. App. 3d 588, 593, 653
N.E.2d 1267, 1270 (1995). Due to the prominent presence of company trademarks in every
franchise location, the doctrine of apparent authority presents a major risk to all franchisors. It is
inherently important in every franchise agreement to be particularly mindful of this risk and to
mitigate it as much as possible.
Provisions Exposing Potential Liability and Mitigating the Risk
Actual Agency:
In order to prevent the potential establishment of an actual agency relationship between
Krispy Kreme and its franchisees it is essential that any provisions in the franchise agreement
concerning control on the part of the franchisor be construed solely as efforts to maintain brand
and product quality as opposed to mandates controlling the means and details of performing the
daily operations of the franchise. The first provision in the agreement creating the potential for
an actual agency relationship is found in section 4.
4.1-4.3 are high risk provisions because they require compliance to a franchisor mandated
set of manuals and system standards. In Parker v. Domino’s Pizza the court held the franchisor

4. vicariously liable for damages caused by the franchisee’s delivery driver due to the existence of
an actual agency relationship. The court established this relationship using the franchise
agreement and the operations manual that it required franchisees to use. The manual in question
outlined delivery guidelines and required compliance to the “30 minutes or less” standard. Since
delivering pizza was a part of the franchise’s day to day operations the court held that an agency
relationship existed between franchisee and franchisor. Parker et al. v. Dominos Pizza et al., (Fl.
App. Ct. 1993).
In the Krispy Kreme agreement, Provisions 4.1 and 4.2 both demand compliance to the
manuals and system standards “solely for use in operating the store.” This is the kind of
language we should attempt to avoid. The phrase “operating the store” could give rise to an
inference that like Domino’s, Krispy Kreme is attempting to control the daily operations of its
franchises. This sentence could easily be replaced with the less intrusive phrase “In the effort of
maintaining brand standards and quality.” Section 4.3 goes on to allow Krispy Kreme to enforce
compliance with the manuals and standards through on site inspections. This serves to
emphasize the control issue created by section 4. Krispy Kreme has every right to ensure the
quality of its products and trademark by setting and enforcing standards, however, it would be
beneficial to make perfectly clear that is their only intention. To this point, I feel it would be
beneficial to exchange the phrase in provision 4.3 “to determine whether franchise is in
compliance with this agreement” with “to ensure franchise is in compliance with all standards of
brand and product quality.” Although alterations in wording can mitigate the potential liability
presented by section 4 to a degree, risk is inherent wherever any level of control exists.
Therefore, I feel it would serve Krispy Kreme well to insert an express provision in section 4
describing with specificity the intended nature and level of their desired control.

5. Section 5 of the agreement also gives rise to liability due to its potential to create an
actual agency relationship. Provisions 5.1-5.3 mandate that the franchisee exclusively use
products provided by Krispy Kreme. The franchisee can only use another supplier by submitting
a request subject to approval by Krispy Kreme. This is a very sensitive area of the agreement
because dictating which supplies the franchisee will be using on a daily basis draws even closer
to controlling the “day to day operations” of the business. Section 5.3 mentions that the
company has the right to periodically inspect products bought from other suppliers to determine
if they meet company specifications, however, the section never expressly identifies maintaining
brand quality as its purpose. I would suggest Krispy Kreme clarify its intent by adding an
express provision denoting maintaining brand quality as the section’s sole purpose.
Section 7 of the agreement presents a similar hazard. Section 7 allows Krispy Kreme to
implement mandatory training programs for the franchisee’s employs. If an employee doesn’t
pass, Krispy Kreme disallows the franchisee from hiring them and has the right to designate their
own replacement. The franchisor placing a hand into the hiring process draws the company ever
closer to the line of actual agency through the control of day to day operations. Krispy Kreme’s
interest here must again be perceived as maintaining their brand and product quality. This
agenda should again be expressed more clearly throughout the section. In order to distance itself
from a furthered sense of control, Krispy Kreme may also want to consider funding employee
training expenses as mentioned at the end of 7.1 on its own. After all, its interest is in
maintaining its own trademark quality, not obtaining money for training its franchisee’s potential
employees or creating any further fiduciary relationship than is necessary in this regard.
Finally, provision 9.2 grants Krispy Kreme a seemingly overbroad sense of actual
authority over its franchisees. This section contains a no-compete clause that disallows the

6. franchisee to have any competing interests anywhere in the entire world. A clause this
burdensome on the franchisee could give rise to a large sense of actual authority on the part of
the franchisor. Krispy Kreme should consider rendering this provision to a regional restriction
disallowing competing interests in the southeast United States, where Krispy Kreme is most
competitive.
Apparent Agency:
As mentioned above, the elements required to establish apparent agency are somewhat
less rigid than those of actual agency. This broadens the scope of liability under the doctrine.
Any representation made by Krispy Kreme that leads a third party to reasonably believe that they
are conducting business with either the company itself, or an agent thereof, could subject Krispy
Kreme to liability. This presents a problem since the Krispy Kreme trademark is present on the
door of every franchise location. It is imperative for Krispy Kreme to take great care in
constructing a franchise agreement that avoids requirements that could unnecessarily heighten
any sense of apparent agency.
In Crinkly v. Holiday Inns, Inc the court held that an apparent agency existed because the
franchisor permitted itself to be represented to a third party as the entity with which the party
was conducting business. The court held that Holiday Inns had failed to properly distinguish
between franchisor and franchise owned hotels. Crinkly v. Holiday Inns, Inc., et al., (4th Cir.
1988). Section 17 of the agreement requires franchisees to place signs in their locations
notifying customers that they are independent contractors as opposed to agents of Krispy Kreme.
This is the best approach available to prevent any similar mistake on the part of third parties
within its franchise locations. Sec. 8 however, deals with a more difficult situation, a scenario in

7. which third parties could potentially conduct franchise related business with franchisees beyond
the walls of a franchise location.
Sec. 8 deals with advertising materials and grants the franchisee the ability to seek out
third parties to create advertisements for the franchise, subject to submission to Krispy Kreme,
approval before use, and a total forfeiture of all “moral rights” to the material on the part of the
franchisee and the third party. This gives rise to a scenario in which a franchisee could acquire
advertising samples from a third party with no prior knowledge of this franchise agreement. This
means that a third party could supply a person they assumed to be an agent of Krispy Kreme with
their intellectual property and forfeit all rights to it unknowingly once it was submitted to the
company. This could potentially subject Krispy Kreme to liability through apparent agency so
long as the third party was damaged by the loss and reasonable in believing they were dealing
with an agent of Krispy Kreme. This problem could be rectified simply by prohibiting the use of
third party material or adding a provision to sec. 8 requiring that Krispy Kreme not only be
notified of any advertising material obtained from a third party, but that they be put in contact
with said third party to confirm their awareness of the forfeiture of their intellectual property
before the material is sent in for approval.
Effective Insulating Provisions
Like most franchise agreements the most effective insulating provisions of the Krispy
Kreme draft are its indemnity clauses. One in particular, provision 17.1, should be highly
protective against establishing apparent agency in claims brought by the franchise’s day to day
consumers. Section 17.1 requires that franchisees “conspicuously and prominently place such
other notices of independent ownership on such forms, business cards, stationery, advertising

8. and other materials as Company may require from time to time.” This gives Krispy Kreme the
right to demand that franchisees place signs in their stores notifying customers that the business
is owned by an independent contractor not acting as an agent of Krispy Kreme. Such signs
should help to combat two elements of any apparent agency action brought by a Krispy Kreme
customer injured within the walls of a franchise. First, so long as Krispy Kreme required signs
to be prominent and visible to customers, they could eliminate any claim that the injured
consumer reasonably believed they were dealing directly with Krispy Kreme or one of their
agents. Second, so long as the signs were in place before the injury occurred, they could
eliminate any claim that the consumer reasonably relied on that agency relationship. Specifics
like sign dimension, placement and quantity could be added directly to this provision to make it
even more effective, however, as it stands it should provide Krispy Kreme with a shield against
the dangers of multiple consumer based apparent agency claims.
Additional Provision to be Added
I feel Krispy Kreme would also be wise to add a provision to their agreement requiring
that franchisees obtain general liability insurance on their franchise and that they name the
franchisor as an additional insured on the policy. According to the court in Hayman v. Ramada
Inn, having the franchisor’s name on the insurance policy does not subject them to vicarious
liability for the acts of the franchisee, furthermore, it provides coverage if the franchisor is in fact
held liable in a claim resulting from such acts. Hayman v. Ramada Inn, Inc., 357 S.E.2d 394
(N.C. Ct. App. 1987).