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The Law of Franchisor Vicarious Liability Just Got a Little Clearer in California

Franchise & Distribution Law Alert Aaron C. Schepler

The California Supreme Court has issued its long-awaited opinion in Patterson v. Domino’s Pizza, LLC, S204546 (Cal. Aug. 28, 2014). In it, the court clarified what has been, until now, a murky area of California law — under what circumstances a franchisor can be liable for the employment practices of its franchisees. Considering the National Labor Relations Board’s recent announcement that it will pursue wage-and-hour claims against McDonald’s under a joint-employer theory of liability, as well as the controversy surrounding the minimum-wage law in Seattle and other cities, the Patterson decision is one of great importance in the franchise industry.

In Patterson, the plaintiff, a teenage girl, went to work for a franchised Domino’s Pizza business in Thousand Oaks, California. Soon after starting, she was allegedly sexually harassed by her manager. She left the job and later filed suit against the franchisee and three entities related to the franchisor — Domino’s Pizza, LLC, Domino’s Pizza, Inc., and Domino’s Pizza Franchising, LLC (collectively, “Domino’s”). Patterson claimed that both the franchisee and Domino’s were her employers and were responsible for the manager’s misconduct. The trial court concluded that the franchisee was an independent contractor, and that the manager was “not an employee or agent of ... Domino’s ... for purposes of imposing vicarious liability.”

The California Court of Appeal, which is one step below the California Supreme Court, reversed the trial court’s ruling. Focusing on the franchise agreement and an operations manual, the court cited a litany of ways in which Domino’s “controlled” the franchisee’s business. The court noted, for example, that Domino’s had access to the store’s computer system (which contained personnel data, among other things), and that it created rules regarding signage, store hours, advertising, equipment, décor, menu pricing, and the like. The court also cited evidence that at one point a Domino’s employee suggested to the franchisee that it should fire the manager for his alleged misconduct. Based on this evidence, the Court of Appeal found that Domino’s controlled the “means and manner” in which the franchisee conducted its business. That fact made the franchisee Domino’s “agent,” which in turn made Domino’s vicariously liable for the franchisee’s failure to prevent its manager from sexually harassing Patterson.

In a 4-3 decision, the California Supreme Court reversed and reinstated the trial court’s ruling in favor of Domino’s. In the supreme court’s view, the fact that Domino’s exercised extensive control over the manner in which the franchisee operates its business was merely a way to ensure the uniformity of the customer experience at its franchised outlets. As the court explained, this uniformity actually benefits both parties to the franchise relationship because “chain-wide variations … can affect product quality, customer service, trade name, business methods, public reputation, and commercial image” and, thus, the value of the brand. And because “comprehensive operating system[s]” are present in nearly every franchise relationship, those systems standing alone could not reasonably “constitute[] the ‘control’ needed to support vicarious liability claims like those raised here.”

As to the specific question of franchisor liability for franchisee employment practices, the court recognized that most franchise agreements, including the one between Domino’s and its franchisee, “allocate local personnel issues almost exclusively to the franchisee.” So long as the franchisor respects the franchisee’s exclusive right to make personnel decisions, it should not be held liable for the franchisees’ employment practices. As the court put it, “[a] franchisor enters this arena and becomes potentially liable for actions of the franchisee’s employees, only if it has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee’s employees.” “Any other guiding principle,” the court wrote, “would disrupt the franchise relationship.”

Recognizing that “the parties’ characterization of their relationship in the franchise contract is not dispositive,” the California Supreme Court examined the parties’ actual course of dealing. It found no significant evidence that Domino’s “retained or assumed the traditional right of general control an ‘employer’ or ‘principal’ has over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee’s employees.” Among other things, the franchisee alone was responsible for interviewing and hiring new employees; it created its own sexual-harassment policy; it was solely responsible for handling any complaints of harassment; and the franchisee ultimately made the decision to suspend the manager.

The Patterson decision reaffirms at least two fundamental principles of franchise law. First, brand standards and operational controls are an important — and mutually beneficial — aspect of the modern franchise relationship. As a result, “[t]he imposition and enforcement of a uniform marketing and operational plan cannot automatically saddle the franchisor with responsibility for employees of the franchisee who injure each other on the job.” To rule otherwise would irreparably disrupt the franchise relationship.

Second, the franchise relationship is an arms-length arrangement between independent business entities, each with its own set of contractually established rights and obligations. One of the key aspects of the relationship is the franchisee’s autonomy as a manager and employer. This contractual right is one that, perhaps more than any other, signifies the franchisee’s status as an independent business owner. As long as the franchisor respects this important contract-based operational division, it should not be held liable when a franchisee’s employee is injured on the job.

With these principles now in place, franchisors doing business in California can breathe easy, right? Probably not. The Patterson decision, while encouraging, was issued by a sharply divided court. The three dissenting justices agreed with the legal standards applied by the majority, but disagreed on how those standards should be applied to the facts of the case. In other words, slightly different facts than those presented could have yielded an entirely different result. So, while the law is somewhat clearer in California as a result of this decision, how the lower courts will apply and distinguish Patterson in future cases is far less clear.

For more information, please contact Aaron Schepler at (602) 229-5263 / [email protected], or your Quarles & Brady attorney.

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