At Your Service? Customer Account Ownership and its Impact on Non-Competes, Control Determinations for Vicarious Liability, and Franchise Goodwill

Date: October 10, 2019
The 2010s have been a decade of greatly increased scrutiny regarding the level of control that franchisors exert over their franchisees. While much of that scrutiny has been exerted by parties outside of the franchise relationship, that spotlight has forced franchisors to examine more carefully the controls they wield over franchisees. However, this willingness to “pull back” on mandates has its limits, and no franchisor wants to be so permissive that it will not obtain a full return on its investment in recruiting and training franchisees. For service businesses, as distinguished from restaurants and most storefront retail, maintaining a hold over the customer lists and contact information developed by a franchisee is a crucial factor for a franchisor, both to gain a return on investment and to create a franchise system that survives for decades rather than years.

Yet a principal goal of all franchisees is to develop a business that it can sell, not just for the value of the physical assets (which may be very modest, especially in a service business) but also for the goodwill that the business has developed with its customers. And it is a legitimate concern of each franchisee that its franchisor not use the customer data that the franchisee developed, at least at the local level, to compete against the franchise. So each franchisee has a vested interest in making sure that it has control over the customer list that it develops in operating the franchise, at least as long as it remains loyal to the franchise system.

This article wrestles with this issue, using a relatively sparse body of case law to describe the factors that courts have used to determine who “owns” the customer list of a franchised business; analyzing how different levels of control may expose a franchisor to liability for claims of either customers or employees of the franchised business; and finally proposing a framework for protecting both the franchisor’s ability to establish long-term, productive franchises while also allowing franchise owners to capitalize on the goodwill that they are instrumental in developing in those businesses.

Insofar as the analysis of this article concerns issues related to (and determined by) customer lists, it is focused on service-based franchised businesses in which customer lists, subscriptions, and relationships are critical to the success of the franchise. Examples include fitness,1 massage spas,2 lawn care,3 in-home senior care,4 “handyman” services,5 and child care centers.6 Customer lists, to the extent that they are compiled by non-service-based franchisees, such as restaurants and retail operations, are beyond the focus of the analysis presented in this article.

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