Product Liability

 

✅ Short Definition

Product liability is the legal responsibility of a business for harm caused by a defective product it manufactures, distributes, or sells. In franchising, product liability may affect both the franchisor and franchisee depending on how the products are sourced, labeled, and marketed. Liability can arise from defects in design, manufacturing, or failure to warn consumers.

🧾 Long Definition

In the franchise relationship, product liability refers to the legal exposure that either the franchisor or franchisee—or both—may face if a product sold through the franchise causes injury, illness, or damage. This can occur in food service, retail, health and beauty, and many other franchise sectors. Liability can result from three types of product defects: design defects (inherent flaws in how the product is made), manufacturing defects (errors in how the product was produced), and marketing defects (inadequate instructions or failure to warn).

Franchise agreements often include indemnity clauses that attempt to allocate risk between franchisor and franchisee. If the franchisor supplies or mandates the product, or controls how it’s labeled and presented, they may bear primary responsibility. However, franchisees may also be held liable if they improperly handle, prepare, or store the product. Both parties often carry insurance policies that specifically address product liability claims to protect the business and brand from legal and financial risk.

Additional Definition: In franchising, the term implies the risk assumed by franchisor and franchisee in providing the franchised goods and/or services to the consuming public.

Learn more about franchising in The Educated Franchise - 3rd Edition

🕰️ History and Usage

Definition of Product LiabilityThe concept of product liability has its roots in common law and began evolving rapidly in the 20th century as consumer protection became a legal priority. Landmark U.S. court decisions expanded manufacturers’ and sellers’ responsibilities for the safety of their products. In franchising, product liability became increasingly important as national brands expanded through local operators, making it more complex to assign legal fault.

High-profile product recalls, foodborne illness outbreaks, or defective merchandise have drawn attention to how franchise systems manage product sourcing, quality control, and liability insurance. As a result, most modern franchise agreements and operations manuals contain detailed standards and procedures aimed at minimizing product liability risk.

❓ Five Common Questions About Product Liability
  1. Who is liable if a defective product harms a customer in a franchise?
    Liability may rest with the franchisor, franchisee, or product manufacturer, depending on the source of the defect and the terms of the franchise agreement.
  2. Can a franchisee be sued for product liability?
    Yes, especially if the franchisee sold, prepared, or failed to properly store the product.
  3. Can franchisors protect themselves from product liability claims?
    Yes, through proper insurance, supplier contracts, quality control systems, and risk-shifting clauses in the franchise agreement.
  4. What kind of insurance covers product liability?
    Commercial general liability (CGL) policies often include product liability coverage, but some franchisors may require additional product-specific coverage.
  5. Does using approved suppliers reduce product liability risk?
    Yes, it helps shift liability to manufacturers or vendors, especially when franchisors require suppliers to meet strict standards and carry insurance.
📝 Examples of Common Usage for Product Liability
  • 'The franchisee was named in a product liability lawsuit after a customer became ill from improperly stored ingredients.'
  • 'To protect the brand, the franchisor requires all franchisees to carry $1 million in product liability insurance.'
  • 'Product liability exposure was addressed in the franchise agreement’s indemnification clause.'
📌 Summary

Product liability is a critical legal concern in franchising, where the sale of goods to consumers carries potential risks. Both franchisors and franchisees must understand how liability is shared and protected through clear agreements, supplier standards, and insurance. Managing product liability effectively helps safeguard the brand, the business, and customer trust across the entire franchise system.

Buying a Franchise? Let the Franchisee Resource Center Help
Get Help
Review Hundreds of FDD’s from top franchises - view the site.
View FDDs
You can buy & download current FDD’s in the industry in one place!
 Buy FDDs
The Insiders Guide | Find the Perfect Franchise for you
Buy the 3rd Edition
© 2021 | The Educated Franchisee | All Rights Reserved
Powered by Saint George