Who's In Charge Here? Recent Decision May Cause Headaches For California Franchisors

California is the birthplace of the franchise business model. Today, there are approximately 62,000 independent franchisees operating in California, employing more than 1.1 million state residents.

Historically, franchisors have not been liable for employment claims brought by a franchisee's employees. However, a recent decision by a California Court of Appeal may encourage disgruntled employees who work for a franchisee to sue both the franchisee as well as the "deep pockets" franchisor as co-defendants in employment lawsuits. In Patterson v. Domino's Pizza, LLC, 2012 Cal. App. LEXIS 753 (June 27, 2012), a California Court of Appeal reversed summary judgment in favor of the defendant franchisor on the grounds that triable issues of material fact existed as to whether the franchisor had sufficient "control" over the franchisee to find the franchisor liable in a sexual harassment lawsuit brought by a franchisee's former employee. Patterson offers several important lessons to companies that operate through independent franchisees in the Golden State.

The Trial Court's Decision

The lawsuit was filed by a then-16-year-old girl who worked for a Domino's Pizza franchisee (the "franchisee") and claimed that she was sexually harassed and assaulted by the franchisee's assistant manager. After resigning from her job, she filed a lawsuit against the assistant manager, the franchisee, and Domino's Pizza, LLC (the "franchisor") in its capacity as the franchisor. Early in the course of ligation, the franchisee filed for bankruptcy protection, leaving the franchisor as the only solvent defendant.

During discovery, the owner of the franchisee testified that an employee working for the franchisor as the "area leader" instructed the franchisee to terminate the assistant manager and at least one other employee. The owner also testified that he had to comply with the area leader's demands on personnel matters, or risk being "out of business very quickly."

The franchisor filed a motion for summary judgment, arguing that it could not be liable to the plaintiff because: (1) the franchisee was an independent contractor pursuant to the written franchisee agreement; and (2) there was no principal-agent relationship between itself and the franchisee. The trial court held that the franchisee was an independent contractor, and thus the franchisor could not be vicariously liable for plaintiff's wrongful termination claims.

The Court of Appeal's Ruling

A California...