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Question of Control

Do a franchisor’s actions speak louder than its words?


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Domino’s says its franchisee is an independent contractor, therefore, the franchisor has no vicarious liability. An appeals court disagrees in a much-watched California case that is still  pending.

 

A vicarious liability dispute now pending before the California Supreme Court is not yet on that judicial body’s docket, but is already causing a stir within the franchise bar and on the pages of law journals.  

A ruling against the franchisor involved, Domino’s LLC of Ann Arbor, Michigan, “could have a very chilling effect on franchising in California,” said Gregg Rubenstein, a partner in the Boston office of Nixon Peabody.

Except for some “troubling” evidence in the appellate court’s opinion, the case unfolds in typical vicarious liability fashion, Rubenstein said. Something happened within a franchisee’s premises and the victim sued both the franchisee and the large corporation whose name was on the door. Such cases, he said, are generally decided in the franchisor’s favor.

What happened in Ventura County in 2009, was a claim of sexual harassment and assault by 16-year-old Taylor Patterson against Renee Miranda, her supervisor in a Domino’s franchise operated by a local company called Sui Juris. Patterson hired an Oakland law firm, Winer & McKenna, and sued both Sui Juris and Domino’s LLC. 

In 2010, Sui Juris owner Daniel Poff filed for bankruptcy protection and Domino’s LLC filed a petition for summary judgment with the trial court, claiming that Sui Juris was an independent contractor that made its own personnel decisions. The trial court agreed that “Domino’s was not Patterson’s employer,” and had no vicarious liability in the case.  

But Patterson’s attorney, Alexis McKenna, successfully appealed. In June, California’s Second District Appellate Court ruled that Domino’s did impose “substantial  control” over the franchisee and therefore could be considered liable. Domino’s immediately filed a petition with the California Supreme Court, asking them to review the appellate decision, and in mid-October the state’s top court granted the request. 

The evidence that could make Patterson what Rubenstein called “a vicarious liability outlier” is within the 10-page opinion published by the appellate court on June 27.  Poff had signed a franchise agreement stating he was an independent contractor, but in his deposition he said he operated on instructions from the franchisor. Poff said that when he signed on with Domino’s, “he was told, in no uncertain terms, that if he did not play ball the way they wanted him to play ball, that his franchise would be in jeopardy.” 

After Patterson filed her complaint, Poff claimed that Domino’s “area leader, Claudia Lee,” told him to fire Miranda and another employee who failed to properly bag food items.  Poff complied, he said, “because if you didn’t, you were out of business very quickly.” 

Domino’s claimed franchisees made all employee hiring and firing decisions themselves. But Poff said the franchisor told him his employees had to “look and act in a certain way.”  McKenna presented evidence from Domino’s Manager’s Reference Guide that specifies detailed hiring requirements, including standards for employee hair and facial hair, jewelry, tattoos, fingernails and tongue rings.  

The court agreed with Domino’s that it “had no notice of, ratified or condoned Miranda’s actions.” But it still overturned the summary judgment, stating that “for purposes of a summary judgment motion, a franchisor’s actions speak louder than the words in the franchise agreement.”

When the California Supreme Court does meet, it will focus only on the vicarious liability issue. If it rules against Domino’s, the full case will be remanded back to the trial court, McKenna said. If Domino’s wins, the outcome is uncertain, unless Poff has other assets.

The franchisor community wants Domino’s to win. This summer, several franchisors and the International Franchise Association filed letters with the California Supreme Court, urging them to consider Domino’s petition. “We told them there is a clear distinction between franchisors and franchisees,” said Jay Perron, the IFA’s vice president of government relations and public policy. Mary Christine Sungaila, a partner in the Orange County office of Snell & Wilmer, who is representing Domino’s in the Supreme Court matter, would not comment.

In the meantime, franchisors everywhere should clarify their positions “by removing all ambiguity about who is responsible for what” in their franchise documents and manuals, said Alex Craigie, a partner in Dykema’s Los Angeles office. Craigie said the Patterson case may show what can happen “when an individual supervisor oversteps her bounds.” He suggested that franchisors “enhance their training of supervisory employees, teaching them how to interact with franchisees in the field so that they don’t create the impression that they are micro-managing.”

 McKenna said she scoured Domino’s documents and operations manuals for signs of control. “I don’t blame franchisors for wanting to exercise control over their franchisees,” she said. “But it doesn’t make any sense if you get the benefit of that control without the risk that you could be held responsible for the misconduct of their employees.” 

 

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