Business Litigation, Franchise & Distribution, Intellectual Property Articles

No Vicarious Liability in Franchise Relationship
by Robert L. Ebe

September 23, 2014

In a long awaited decision late last month, the California Supreme Court resolved a “novel” issue as to potential “vicarious” liability of a franchisor – here the Domino’s Pizza system – for conduct by a franchisee at his local site, finding that the franchisor was not liable for alleged sexual harassment by one of the franchisee’s store managers of another, subordinate employee of the franchisee (alleged “victim”).  Patterson v. Domino’s Pizza, LLC, (No. S204543) (August 28, 2014).

The victim sued the franchisee, the manager and the Domino’s franchisor.  Illustrating the divisive nature of this issue, the trial court had dismissed by summary judgment the victim’s claims against Domino’s, but the appellate court reversed and reinstated the claims.  The Supreme Court reversed and reinstated the summary judgment dismissal of the franchisor.

The Court acknowledged the “massive growth” that franchising has experienced in American business (“a ubiquitous, lucrative and thriving business model”).  In the business format method, a franchisor licenses its trademark to local franchisees, who pay royalties and fees for the right to do business under that name, and must comply with the franchisor’s “comprehensive and meticulous standards” and procedures for doing business.  Local franchisees, however, are responsible for implementing these standards, and thus generally retain the autonomy to do all hiring, training, disciplining and firing of their employees, among other things. 

The Court believed that when a franchisor imposes and enforces such a uniform plan, that alone cannot “automatically saddle” it with responsibility for what employees of the local franchisee do to injure each other.  The franchise agreement specifically disavowed the existence of a principal-agent relationship between the franchisor and franchisee (an “independent contractor”), who was not authorized to act on the franchisor’s behalf, and the agreement specifically gave the franchisee responsibility for its employees.  For liability potentially to exist, a victim must show that the franchisor exhibited the “traditionally understood” characteristics of an employer, or principal.  The franchisor must retain or assume 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”, considering the totality of circumstances.  In this case, the local franchise made those decisions, not the franchisor. 

The Court was not swayed by the fact that a franchisor representative told the franchisee during a visit that the alleged harasser should be fired.  It was not reasonable to infer from this statement that the franchisor controlled discipline over sexual harassment complaints.
 

Back to Articles