Contributed by Tom Kent

It’s a constant push/pull in the franchise relationship; how much control is too much? Last week, the California Court of Appeal found that Domino’s Pizza, LLC, the franchisor of the Domino’s brand, may have exerted too much control over a franchisee, giving rise to the possibility that the franchisor may be vicariously liable for a sexual harassment claim brought by an employee of a franchisee.

The case, Patterson v. Domino’s Pizza, LLC, et al. (Super. Ct. No. 56-2009-00347668-CU-OG-SIM), (PDF) is the latest development involving vicarious liability of franchisors. Here, the plaintiff alleged that he was sexually harassed and assaulted by an employee of Sui Juris, a Domino’s franchisee. The plaintiff sued Sui Juris and the franchisor under California’s Fair Employment and Housing Act.

Domino’s prevailed at the trial court level in it’s motion for summary judgment, claiming that Sui Juris was an independent contractor and that no agency relationship between the franchisor and franchisee existed. Domino’s based its argument on it’s franchise agreement which stated, in part, that “Sui Juris is responsible for supervising and paying the persons who work in the store.” Id.

The appellate court disagreed. In the first sentence of the Court’s opinion, it states, “Here, for purposes of a summary judgment motion, a franchisor’s actions speak louder than words in the franchise agreement.” Id. The court then focused on testimony provided by a principal of Sui Juris regarding the degree of control Domino’s exerted over his day-to-day business operations. The franchisee testified that an “area leader” of the franchisor told him to terminate certain employees, including the plaintiff, on more than one occasion. The franchisee testified that his understanding was failure to follow such directives would result in the termination of his franchise agreement. While Domino’s presented evidence to the contrary, the court did not resolve factual disputes as it was evaluating a motion for summary judgment.

The court also pointed to some rather garden variety “controls” that Domino’s exerts over its franchisees in reaching its conclusion that Domino’s may be vicariously liable for the alleged misdeed of its franchisee. Specifically, the court noted that “provisions of the agreement substantially limit franchisee’s independence in areas that go beyond food preparation standards. The franchisee’s computer system is not within its exclusive control. Domino’s has “independent access” to its data. Domino’s has the right to audit the franchisee’s tax returns and financial statements.” The court also highlighted Domino’s ability to determine the franchisee’s store hours, advertising, signage, equipment, fixtures and a number of other operating standards found in most franchise agreements. However, these contractual provisions, standing alone, would not lead one to conclude that Domino’s crossed the line in terms of controlling day-to-day business operations.

In the end, this case will turn upon the controls Domino’s exerted over the employment practices of it’s franchisee. Never mind that there is no allegation referenced in the opinion that Domino’s had knowledge of the alleged harassment, or that the franchise agreement specifically stated that the franchisor had no role in employment decisions of its franchisees. The court has set the stage for a decision that if the franchisor exerted substantial control over a franchisee’s employment practices, the franchisee will be deemed an agent of the franchisor, notwithstanding explicit language in the franchise agreement to the contrary.

Will a jury find that one of the franchisor’s employees told its franchisee to terminate certain employees? Is this type of direction regarding employment decisions an isolated incident within the Domino’s system or representative of a pattern of conduct? Domino’s could be on the hook for the claims of the plaintiff, notwithstanding the terms of its franchise agreement. California courts have already found that “the provisions of franchise agreements are not necessarily controlling.” (Wickham v. Southland Corp. (1985) (168 Cal. App. 3d 49, 59.) How much control is too much control in California? We’re about to find out.