[The following is excerpted from “Environmental Liability: Managing Environmental Risks in Corporate, Real Estate and Brownfield Transactions” written by Larry Schnapf and published by Lexis Law Publishing]

CERCLA Liability of Franchisors

Franchising has become a common form of business relationship in the 2Oth century. In the typical franchise relationship, the franchisor sells the right to operate under its name to a franchisee in exchange for some form of consideration. The franchisee operates much like a business since it invests its own capital in the business, incurs the expenses, and retains the net profits generated by the business, However, the franchisor retains a certain degree of operational control over each franchisee. Because of the control or potential control that franchisors may exercise over the franchisees, lawsuits have been filed against franchisors over the years on the grounds that the franchisor's control over the franchise business either by actual exercise over the day-to-day operations or through the inherent authority contained in the franchise agreement created an agency relationship for which the franchisor was vicariously liable. Other courts have also imposed liability on an apparent agency theory where it was reasonable for a third party to believe that the relationship between the franchisor and franchisee was a master/servant. Another possible theory of liability is the tort principle of non-delegable duty for inherently dangerous activities. If a court finds that the disposal of waste oil is inherent in the service station business and is also an inherently dangerous activity, then the court could conclude that the franchisor could still be liable for the acts of its franchisee even if it is considered an independent contractor since the disposal of waste oil would be a non-delegable duty.

Courts have examined a number of factors in determining whether a franchisor should be held liable for the damages caused by its franchisee. These factors include whether the franchiser is involved in the hiring and firing of employees, setting of wages and benefits, selection of uniforms, control over promotions, establishing pricing and size of products, such as meals, hours of operation, requiring use of forms and supplies, and mandating certain methods of financial reporting or recordkeeping. The difficulty in practice has been that courts seem to attach different weight to different factors. For example, the right to specify hours of operation has been dispositive in some jurisdictions but not in others. Further complicating the task of delineating a clear test for franchisor liability is the variety of franchising relationships and agreements. For example, not all franchisors offer training and continuing assistance to their franchise nor do all franchisors sell or lease equipment or inventory. Some franchisors charge franchise fees while others also take commissions or royalties on sales or some combination of both.

During the past few years, a number of CERCLA contribution actions have been filed against franchisors. Most of these cases have involved gasoline service stations where the dealership either disposed of waste motor oil and the plaintiff seeks to impose liability on the oil company as an arranger or where there has been a release of waste oil at the dealership and the operator liability is sought to be imposed on the oil companies.

The seminal case in this area is General Electric V. AAmco Transmissions, Inc. In that case, the plaintiff brought a contribution action against 30 individual service stations that it alleged arranged for the disposal and transport of waste oil as well as three major oil companies who leased the service stations to the dealers and sold petroleum product. The three oil companies then moved for summary judgment.

The dealers leased the service station premises and certain equipment, including an underground storage tank for storing waste oil. The agreements between the dealers and the oil companies set forth specific responsibilities for the maintenance and upkeep of the service stations. For example, the dealers were required to maintain the premises in a certain manner, keep specific minimum hours, and purchase specific minimum quantities of petroleum products. The dealers were required to perform daily or weekly maintenance and inspections on the underground storage tanks and were required to empty the waste oil tank. The oil companies conducted periodic inspections to ensure that the station premises and equipment (including the waste oil tank) were maintained in accordance with the dealer agreement. Significantly, each lease agreement contained a clause which stated that the dealers were independent businessmen and that the lease did not reserve any right to the oil company to exercise any control or direct the management of the operations or business of the lessee.

The plaintiff urged the court to find the oil companies liable because they had the ability to control the activities of the dealers. However, the court distinguished the line of cases imposing liability on the mere ability to control operations on the basis that those cases involved defendants who were alleged to be owners or operators of facilities as opposed to generators. The court said that the factors which make an owner or operator liable do not apply with equal force in deter-mining generator liability.
The court went on to say that while generator liability could attach to parties that do not have actual involvement in the timing, manner, and location of disposal, Congress did not dispense with traditional notions of duty and obligation when it created generator liability and that there had to be some nexus between the potentially liable party and the disposal of the hazardous substances. It was not the mere ability to exercise control over hazardous substances which created generator liability, the court continued, but the obligation to exercise control over the disposal of hazardous substances.

While the oil companies did exercise control over certain aspects of the dealers' business, the court found that the oil companies did not exercise any control over the waste oil disposal practices and that the oil companies had not contractually obligated themselves to dispose of the waste oil. The court was influenced by the "independent business" clause in the agreements and the fact that the agreements did not require the dealers to change oil. The court also rejected the argument that the oil companies should be liable because they leased the under-ground storage tanks and sold the motor oil used for the oil changes. The court found that neither of these circumstances created an obligation to control the waste oil generated by the oil changes.

In another summary judgment case, a federal district court took the AAmco decision one step further in U.S. V. Arrowhead Refining Company. There, the court said that even if Mobil Oil had required its dealers to perform oil changes, this would not impose liability on Mobil because such a requirement did not create an obligation upon Mobil to control or dispose of waste oil. The court recognized that oil changes were an essential part of the service station business but found that the mere existence of economic bargaining power or knowledge of waste disposal activities did not create the necessary nexus to impose liability on Mobil. Instead, the court said that there had to be actual exercise of management authority over the particular activity. The court also noted that while Mobil sold motor oil to its dealers, it did not possess or own the used oil collected by the dealer.
Franchisors have been held liable in the past under traditional theories of liability for the activities of their franchisees when they exercised the kind of general control which was evidenced in these cases. 

There would appear to be sufficient CERCLA case law to impose liability upon franchisors under the facts of these cases. In many ways, the franchiser cases are similar to the parent/subsidiary cases since there is some degree of mutual interdependence yet at the same time both entities retain a level of independence. Parent corporations have been held liable when they become intimately involved in the day-to-day operation of their subsidiaries or when they possess the capacity to control the operations of their subsidiary. Indeed, one case even imposed liability on a parent where it had the ability to control the operations of its subsidiary. In addition, lenders have been held liable when they had the capability of influencing the waste disposal decisions of their borrower. Finally, the AAmco court's attempt to distinguish "operator" situations from "arranger" situations seems unfounded especially since a parent corporation was found liable as "generator" for the activities of its wholly-owned subsidiary in New York V. Exxon Corp.

While there are no reported cases of a franchiser being held liable for the damages, these decisions are extremely fact-sensitive. Indeed, in two recent cases courts have denied the summary judgment motions of oil companies. In ACME Printing Ink Co. V. Menard, Inc. the court found no evidence that Texaco had been responsible for waste oil disposal but because no discovery had been conducted, the court ruled the motion was premature. 

The oil companies had prevailed in these cases until the recent Indiana Supreme Court decision in Shell Oil Co. v. Meyers. In that case, the court held that the fuel supplier used by Shell was an operator of the USTs because he had filled and measured the contents of the tanks. The court found that operating USTs was an inherently dangerous activity and that the USTs had created a nuisance because the gasoline had contaminated drinking water wells of six families. As a result, Shell was held vicariously liable for the actions of the contractor it had hired to deliver the fuel. Unlike the RCRA citizen suit provision, the Indiana UST law allows plaintiffs not only obtain reimbursement of attorney fees but also monetary damages from owners and operators of USTs. Under the ruling, Shell may be ultimately have to pay up to $3 million in cleanup costs and attorneys fees .  

The precedential value of this case is unclear for a number of reasons. First, the court rejected the theory that oil refiners could be liable as operators because of their potential control or leverage over the station operations. In addition, the fuel distribution arrangement in this case was generally abandoned by the petroleum industry decades ago. Indeed, the other oil company defendant in the case, Unocal Oil, was not found vicarious liable because it had used a middleman or jobber. Finally, many states do not consider the operation of USTs to be an inherently dangerous activity for which vicarious liability should be imposed.

(c) Copyright 1999 Lawrence Schnapf