Read the full decision: New Star Realty, Inc. v. Jungang PRI USA, LLC

Georgia appellate court reverses jury verdict that held the franchisor vicariously liable for actions of franchisee because there was no evidence to support the verdict against the franchisor.

A residential and commercial real estate franchisor (“Franchisor”) based in California sold a franchise to an entity located in Georgia (“Franchisee”). The franchise agreement allowed the Franchisee to use the Franchisor’s brand name, logo, and proprietary business system. In addition, the Franchisor would provide marketing and advertising support as well as provide referrals through the Franchisor’s network. In return, the Franchisee paid a franchise initiation fee and made an annual royalty payment for the properties it sold while it remained a franchise.

the Franchisee’s top salespeople and senior vice president (“Salesperson”) of the Franchisee also participated in a real estate investment company (“Investor”) run by his brother. The owner (“Owner”) of the Franchisee informed the Salesperson and others during an office meeting about a real property investment opportunity that was located directly across the street from a Kia Motor plant. The Salesperson conveyed the information to her brother, and the Investor put down $1,000,000 as an earnest money deposit, with the sale set for closing 45 days later. The Owner told the Investor that the deposit would be held in the Franchisee’s trust account.

The closing did not occur as scheduled. Six months later, the transaction continued to be delayed and the Salesperson requested a return of the earnest money but the Owner assured the Salesperson that the transaction would close. In actuality, the Owner had diverted the earnest money into another investment and had lost the entire sum. Eventually, the Owner told the Salesperson that the earnest money deposit was gone. The Investor learned that the Owner had been able to remove the entire earnest money from the Franchisee’s trust account without attracting any scrutiny.

The Investor brought a lawsuit against the Owner, Franchisor, and the Franchisee, seeking to recover the lost earnest money deposit. The Investor alleged that the Franchisor was vicariously liable for the actions of the Franchisee under theories of actual and apparent agency as well as alleging as acting negligently in selecting the Owner to operate the Franchisee. The jury returned a verdict against the Franchisor, finding the Franchisor 12.5% at fault and awarding the Investor $200,000 in attorney fees and other statutory damages from the Franchisor. The trial court rejected the Franchisor’s post-trial motions, and the Franchisor appealed.

The Georgia Court of Appeals reversed the trial court. Under the agency theories advanced by the Investor, the Franchisor would have needed to have authorized the Franchisee to act on its behalf or held the Franchisee out as its representative in order for it to be vicariously liable for the Investor’s losses. The court found that the evidence did not support these conclusions. While the Franchisor had rules on governing the reporting of fees and gave the Franchisor the power to terminate the relationship, the Franchisor did not control the day-to-day activities of the Franchisee. Further, the Salesperson was aware of the relationship between Franchisor and Franchisee and since she was also a part owner of the Investor, the Investor couldn’t argue that it was harmed by a mistaken impression of the relationship between the Franchisor and Franchisee. Thus, the court rejected the agency allegations as support for holding the Franchisor vicariously liable for the actions of the Franchisee.

Next, the court considered whether the Franchisor was negligent when it selected the Owner to operate the Franchisee. The court found that there was no legal duty for the Franchisor to protect unknown third parties when it selected an owner of a franchise. The Franchisor was also not liable for the negligent supervision or hiring by the Franchisee because the Franchisor had no control over the day-to-day operations of the Franchisee. Therefore, the court ruled there was no evidence supporting the finding that the Franchisor was vicariously liable for the actions of the Franchisee and so the court reversed the judgment by the trial court.

New Star Realty, Inc. v. Jungang PRI USA, LLC, 816 S.E.2d 501 (Ga. Ct. App. 2018).