California’s Highest Court Finds Domino’s Not Vicariously Liable

19/09/2014
Franchisor Not Liable for Harassment by Franchisee’s Employee
Under a new ruling by the California Supreme Court, franchisors can protect their brands using system-wide standards without the risk of being vicariously liable for employment-related actions of their franchisees.
A. California Supreme Court Holds Franchisor Not Vicariously Liable for Alleged Wrongful Conduct by a Franchisee’s Employee.
On August 28, 2014, the California Supreme Court issued a landmark ruling in favor of Domino’s Pizza and all business format franchisors that do business in California. In Patterson v. Domino’s Pizza, LLC, the court held that Domino’s Pizza was not vicariously liable for wrongdoing by a franchisee's employee, because Domino's did not retain or assume the general right of control over relevant day-to-day aspects of the employment and workplace behavior of the franchisee's employees. The court enunciated a clear rule: a franchisor “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.”

B. Franchisor’s Right or Duty to Control is the Liability Lynchpin.
Patterson teaches franchisors to steer clear of day-to-day control of a franchisee's workforce or employment matters. In a closely divided ruling (4-3), the majority focused on the franchisor and franchisee’s relative control of employment matters to hold that Domino’s was not vicariously liable for sexual harassment allegedly committed by the franchisee’s employee. The court held that the franchise agreement did not give Domino’s any right or duty to control employment matters for the franchisee. On a functional level, the franchisee exercised sole control over hiring, firing, supervising, managing, scheduling and paying its employees, among many other aspects. Moreover, the franchisee made the decision to discipline the employee who engaged in the alleged misconduct.
The court thus concluded that Domino’s did not retain or assume the right to control the franchisee's employees and, therefore, could not be held vicariously liable for their actions. The court’s focus on a narrower test, which examines controls over the relevant day-to-day workplace, bolsters the nationwide trend of evaluating a franchisor’s control over the very subject matter at issue before finding a franchisor liable for the actions of its franchisee and their employees.
C. Court Affirms Value of Franchising Business Model.
The California Supreme Court’s decision is also notable in that it affirms the value of franchising in the modern American economy and acknowledges that traditional legal analyses of agency and vicarious liability must evolve to “accommodate these contemporary realities.” The court expressly preserved a franchisor’s ability to enforce uniform system-wide standards without risking vicarious liability for the misdeeds of franchisee employees. In particular, the court explained that a franchise operating system alone cannot constitute the “control” necessary to impose vicarious liability on the franchisor.
D. Franchisors Need to Remain Vigilant Over What Controls They Exercise.
Although a victory for franchisors, the Patterson decision does not alleviate all concern over liability being imposed on franchisors for the actions of their franchisees. The Patterson decision did not address franchisor vicarious liability under an alternative theory called “ostensible” agency. Under this theory, plaintiffs argue that a franchisor should be liable for the bad acts of a franchisee because (a) based on the franchisor’s actions, the plaintiff was unaware that the two are different entities; or (b) the franchisee is a mere conduit for the franchisor. Additionally, the decision does not resolve the angst that franchisors face in light of the recent efforts by the National Labor Relations Board (NLRB) Office of General Counsel to hold franchisors responsible for allegedly unfair labor practices of their franchisees. Thus, franchisors must continue to remain vigilant in ensuring that their policies and procedures are tied to the protection of their brand and goodwill, and that they steer clear of getting involved in day-to-day control of the franchisee's workforce or employment matters.
About the Authors:
Kerry Bundy is a partner and Justin Krypel and Nick Rotchadl are associates in the Minneapolis office of Faegre Baker Daniels LLP. They regularly represent franchisors in domestic and international disputes and provide counseling on franchise relationship issues.

By:http://franchises.about.com/od/franchiselegalissues/fl/Californiarsquos-Highest-Court-Finds-Dominorsquos-Not-Vicariously-Liable.htm?nl=1

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