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August 2014

California Supreme Court Rejects Attempt to Hold Franchisors Responsible for Franchisee’s Employment Actions

On Aug. 28, the California Supreme Court handed down an important decision addressing vicarious liability for franchisors in the employment context. 

In Patterson v. Domino’s Pizza, LLC, the plaintiff sued Domino’s for sexual harassment by an employee of a franchisee.  Domino’s moved to dismiss the case and, although the trial court granted the motion, the Court of Appeal reversed.  The court held there was enough evidence to have the case go to a jury trial based on how much control Domino’s exercised over its franchisees.  What was disturbing to franchisors was that much of this "control" relied upon by the Court of Appeal is typical for franchisors (certainly in the food service business). 

One unusual aspect of the underlying case was that Domino’s seemed to be very involved in the employment decisions of the franchisee.  In particular, there was an allegation that a Domino’s representative told the franchisee to fire the alleged harasser and the franchisee felt he had to do so or be terminated.

The Supreme Court reversed the Court of Appeal’s decision overturning summary judgment in the franchisor’s favor.  The high court went into a comprehensive analysis of the nature of franchising and its special features, emphasizing its explosive growth and importance to the economy.   The court concluded that the fact that the franchisor prescribed certain standards (part of the essential nature of franchising) does not mean a franchisor is automatically liable for the conduct of franchisees.  Instead, a traditional employer/principal analysis is required of who has retained the general right of control over factors such as hiring, supervision, and discipline, and it is clear that this was the franchisee.  The court dismissed the role of Domino’s in the termination, concluding it was the franchisee’s decision.

The court did note that a franchisor will be liable if it has retained the right of general control over the day-to-day operations of its franchisees.  While this is an unlikely scenario, franchisors should expect to see attempts by plaintiffs’ counsel to exploit this language.  

The court also addressed ostensible agency issues, which are common in franchisor vicarious liability cases, finding that such issues were not presented in this case.

The overall reasoning of this decision, and its recognition of the economic reality of the separation between franchisors and franchisees, will definitely provide franchisors with ammunition to argue against liability in vicarious liability claims.

To read the opinion, click here.

Franchise Law

Calvin E. Davis

Franchise Law