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Authored by aburger, jboutrous and jweinberg  


     A recent potentially far-reaching California Court of Appeals decision, Patterson v. Domino’s Pizza, LLC, raises concern for franchisors and may trigger in internal evaluation of the amount of control being actually or impliedly exercised over franchisees.  Furthermore, the decision may also call for careful analysis of franchise agreements.

     In connection with an action by an employee for sexual harassment, the California Court of Appeal, Second District, ruled that actions spoke louder than the franchise agreement when it refused to allow Domino’s Pizza out of the case. The Court found that although the franchise agreement clearly stated that Domino’s franchisee was an independent contractor, Domino’s could not rely upon the language where, Domino’s acts in enforcing its agreement, potentially established substantial control over the franchisee. The Supreme Court of California granted review of the case to determine whether Dominos is entitled to summary judgment on the plaintiff’s claim that it is vicariously liable for conduct by a supervising employee of a franchisee.  The Supreme Court of California has yet to rule.

     The case calls for review and consideration of multiple aspects of the franchisor/franchisee relationship including but not limited to: enforcement of marks and standards, control of hiring practices and retention, how to conduct a review in a confidential, privileged and non-discoverable manner.

     In the case, the Plaintiff, Taylor Patterson, was a teenage employee of the Defendant, Sui Juris, a Domino’s pizza franchisee.  Renee Miranda was the assistant manager of that particular restaurant, and Patterson claimed that Miranda sexually harassed and assaulted her at work.  Patterson filed an action against Miranda, Sui Juris, and the franchisor Domino’s under the California Fair Employment and Housing Act.  She claimed Sui Juris and Domino’s were Miranda’s employers and were vicariously liable for his actions under the doctrine of respondeat superior.

     Domino’s moved for summary judgment, claiming that Sui Juris was an independent contractor pursuant to the terms of its written franchise agreement and that there was no principal-agency relationship between Sui Juris and Domino’s that could make Domino’s liable for Sui Juris’s misconduct.  Patterson opposed the motion claiming that Domino’s exercised substantial control over Sui Juris.

     The trial court ruled in favor of Domino’s and granted summary judgment.  It ruled that Sui Juris was an independent contractor and that Miranda was not an employee or agent of Domino’s for purposes of imposing vicarious liability.  The trial court noted that the franchise agreement between Domino’s and Sui Juris provided that Sui Juris was responsible for “supervising and paying the persons who work in the Store.”

     In its opinion, the California Court of Appeals utilized the totality of the circumstances standard to determine who actually exercised the ultimate control between a franchisor and its franchisee.  Even though the provisions of a franchise agreement are relevant, they are not exclusive as evidence of the franchisor-franchisee relationship.  Where a franchise agreement gives the franchisor the right to complete or substantial control over the franchisee, an agency relationship exists even if the franchise agreement states the franchisee is an independent contractor.

     The Court observed various factors about the franchisor-franchisee relationship that raised reasonable inferences supporting Patterson’s claim that the Sui Juis was not an independent contractor of Domino’s including: Domino’s set both the qualifications for franchisee’s employees and the standards for their demeanor, the franchisee was required to install a computer system designated by Domino’s for employee training, Domino’s set specific employment hiring requirements for all personnel involved in product delivery, and Domino’s set employee appearance standards and timekeeping procedures.  A violation of any of these provisions could result in the termination of the franchise by Domino’s. 

     The Court of Appeal determined that these requirements raised reasonable inferences supporting Patterson’s claim that a lack of local franchisee management independence existed and overturned the trial court’s holding. It ruled that “a franchisor may be subject to the vicarious liability where it assumes substantial control over the franchisee’s local operation, its management-employee relations or employee discipline.” 

     The takeaway from this potentially groundbreaking case is that the franchise vicarious liability doctrine is not defined solely by the writing in the franchise agreement and that labels in the franchise agreement are not necessarily controlling in determining whether an agency relationship exists.  Franchisors must be aware of the totality of the circumstances standard when analyzing the franchisor-franchisee relationship for purposes of vicarious liability determinations with regard to various tort causes of action.  After this case, many features of a typical franchise agreement may now create a principal-agent relationship rather than a principal-independent contractor relationship.  Therefore, franchisors should take precautions to ensure that the franchisee has the right to control day-to-day operational details, with the franchisor retaining control over the business result.  Patterson is a great reminder that it is difficult to maintain this distinction in practice, and perhaps changes need to made in both the franchise agreement and overall franchisor-franchisee relationship.