Friday, August 24, 2012

Court Of Appeal Decision Is a Cautionary Tale for Franchisors and For Franchisees

The California Court of Appeal’s recent decision in Patterson v. Domino’s Pizza, LLC, serves as a cautionary tale for franchisors and for franchisees.  The Court of Appeal held a Franchisor can be held liable for alleged sexual harassment of an employee of the franchisee by a supervisor employed by the franchisee and for related claims.
Taylor Patterson filed suit against Sui Juris, LLC, dba Domino’s Pizza (the Franchisee), Domino’s Pizza, LLC, Domino’s Pizza, Inc., and Domino’s Pizza Franchising, LLC (collectively “Franchisor”) alleging causes of action for sexual harassment in violation of the California Fair Employment and HousingAct (“FEHA”), failure to prevent discrimination, retaliation for exercise of rights, infliction of emotional distress, assault, batter, and constructive wrongful termination.  Patterson alleged that an assistant manager of Franchisee sexually harassed and assaulted the then 16-year-old employee at the workplace. 
The Franchisor argued to the trial court that summary judgment should be granted in favor of the Franchisor and against Patterson on the asserted ground that the Franchisor was not Patterson’s employer and therefore could not have any liability.  The trial court agreed with Franchisor and granted the motion.  The trial court ruled, also, that even if Franchisor was considered to be Patterson’s employer, Franchisor still would not be liable based on the trial court’s finding there were no triable issues of fact showing the Franchisor had notice of, ratified, or otherwise condoned the alleged conduct on the part of the Franchisee’s assistant manager. 
On appeal, the Court of Appeal rejected both of Franchisor’s arguments and reversed the decision of the trial court granting summary judgment in favor of the Franchisor:
  • The Court of Appeal held Franchisor did not meet its burden of showing the undisputed facts establish that the Franchisee was not an agent of the Franchisor and therefore not vicariously liable for the alleged conduct on the part of the Franchisee’s assistant manager.   The Court of Appeal held the terms of the franchisee agreement are not controlling and looked to the extent the Franchisor exercised control over the Franchisee’s operations, stating “a franchisee may be found to be an agent of the franchisor even where the franchise agreement states [the franchisee] is an independent contractor,” and stated, “[i]f the franchisor has substantial control over the local operations of the franchisee, it may potentially face liability for the actions of the franchisee’s employees.”  The Court of Appeal explained that the Franchisor exercised significant control over how the operations of the Franchisee, including the relationship between the franchisee and the employees of the Franchisee and concluded the Franchisor failed to demonstrate that the Franchisee was not an agent of the Franchisor.  The court found it significant that the Franchisor area manager directed the Franchisee to terminate among other employees of the Franchisee, the assistant manager who allegedly harassed Patterson. 
  • The Court of Appeal rejected the trial court’s determination that the Franchisor could not be liable because there was no showing the Franchisor had notice of, ratified, or condoned the conduct of the assistant manager of the Franchisee.  The Court of Appeal held the trial court applied the wrong standard and explained that when the alleged harasser is a supervisor or a manager of the allegedly harassed employee, the employer(s) of the alleged harasser is/are strictly liable under the FEHA. 
The case presents a cautionary tale for franchisors in that it serves as a reminder that a franchisor can be exposed to liability for, among other things, employment related claims made by franchisee employees if the franchisor exercises sufficient control over the operations of a franchisee. 
The case presents a cautionary tale for franchisees as well.  Franchise agreements often contain provisions requiring the franchisee to defend, indemnify, and hold harmless the franchisor against claims arising from the franchisee’s operations, including employment related claims.  Such defense, indemnity, and hold harmless obligations can substantially increase the cost of defending a lawsuit if, for example, the franchisee is required to fund the franchisor’s defense, and if the franchisee cannot obtain an early dismissal of the franchisor.
Furthermore, the reasoning of this decision could, depending upon the particular factual circumstances, be extended to other business relationships, where one entity exerts substantial control over the activities or operations of another entity.