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California Justices Limit Franchiser Liability, Find Domino's Isn't Store Worker's Employer

Tuesday, September 2, 2014

By Chris Opfer

Aug. 29 — Domino's Pizza LLC isn't liable for alleged sexual harassment by a manager at one of the chain's franchise locations, the California Supreme Court ruled 4-3 in a much-anticipated decision Aug. 28 limiting franchiser liability under state law.

Reversing an appeals court decision, the high court said Domino's exercised “vigorously enforced” control over franchisee activities like pizza making, delivery, store operation and branding. The company wasn't, however, sufficiently involved in day-to-day hiring, firing and supervision to warrant liability for Taylor Patterson's common law and Fair Employment and Housing Act claims.

“The contract-based operational division that otherwise exists between the franchisor and the franchisee would be violated by holding the franchisor accountable for misdeeds committed by employees who are under the direct supervision of the franchisee, and over whom the franchisor has no contractual or operational control,” Justice Marvin R. Baxter wrote for the majority. Baxter said Domino's had no such control over franchisee workers, despite evidence that a Domino's area leader told the franchisor who owned Patterson's store to fire the alleged harasser.

Michael Lotito, co-chair of Littler Mendelson's Workplace Policy Institute, told Bloomberg BNA Aug. 29 that the labor and employment bar has been keeping an eye on the case to see whether the court would expand franchiser liability. He said the ruling is an important check against National Labor Relations Board General Counsel Richard F. Griffin's recent decision to authorize complaints alleging that McDonald's USA LLC is a joint employer of the restaurant chain's franchisee employers.

“This decision sends a message to the NLRB,” Lotito, whose firm wasn't involved in the litigation, said. “I don't think for a minute that Mr. Griffin is going to withdraw any complaints he's working on against McDonald's, but this shows how excessive his position is.”

The decision also comes as California Gov. Jerry Brown (D) considers whether to sign into law a measure (S.B. 610) that would protect franchise owners from early termination of their contracts by corporate franchisers. The legislation would re-balance the franchiser-franchisee relationship and could raise new questions about vicarious liability, observers told Bloomberg BNA.

In a dissenting opinion, Justice Kathryn M. Werdegar wrote that the majority overstepped its bounds in making factual determinations about the franchise relationship that weren't warranted at the summary judgment stage. She said there was sufficient evidence that the Domino's area leader had at least some control over the franchisee's firing decisions.

Resigned After Harassment

Patterson sued Domino's, franchisee Sui Juris LLC and assistant store manager Renee Miranda in June 2009. She claimed that she was forced to resign from her job at a Southern California Domino's owned by Sui Juris after being sexually harassed by Miranda.

Patterson said Miranda regularly made lewd comments and gestures while the two were working at the store and that he also inappropriately touched and grabbed her. She reported the problem to Sui Juris owner Daniel Poff and to her father, who later called Domino's customer complaint number to complain about the harassment.

Patterson further alleged that her hours were reduced when she returned to work after reporting Miranda's behavior. She resigned from her position the following week.

To find that this type of business relationship necessarily makes franchisers vicariously liable for a franchisee's behavior, Judge Baxter wrote for the majority, “would turn business format franchising on its head.”

Patterson alleged claims for sexual harassment, retaliation and constructive discharge under the FEHA. She also asserted common law claims for assault and battery and intentional infliction of emotional distress.

A trial court granted summary judgment to Domino's, finding that the company wasn't Patterson's “employer” for liability purposes. That decision was later reversed by an appeals court, which found that Patterson had raised triable fact issues about the alleged employer relationship.

150-Year-Old Business Model

Ruling for Domino's, the supreme court held that the general franchising arrangement between the company and Sui Juris wasn't enough alone to show that the company exerted sufficient control over the franchisee workforce to qualify as an employer.

Baxter noted that the franchising model “has existed in this country in one form or another for over 150 years.” He said the model has had “profound” economic effects and it currently “employs millions of people, carries payrolls in the billions of dollars, and generates trillions of dollars in total sales.”

To find that this type of business relationship necessarily makes franchisers vicariously liable for a franchisee's behavior, the majority said, “would turn business format franchising on its head.”

But Alan Charles Dell'Ario, who represented Patterson, said the court's exaltation of the franchise arrangement was misplaced. “There seems to be some notion that franchise is the American way,” Dell'Ario told Bloomberg BNA Aug. 29. “The reality is that this notion is nonsense,” he said. “There's a natural tension created in these relationships because the franchiser wants the income and the control without any liability.”

Judges Tani Gorre Cantil-Sakauye, Ming W. Chin and Carol A. Corrigan joined in the majority decision.

Franchiser Handled Harassment Policy

The court said the appeals court erred in ruling that a triable issue of fact remained as to whether Domino's should be held liable for the alleged harassment based on an employer or agency relationship.

The contract between Sui Juris and Domino's made clear that workers at Sui Juris stores were the franchisee's employees solely, and it expressly stated that there was no agency relationship between the parties, according to the court. It also provided that Sui Juris was responsible for recruiting, hiring, firing and training store employees, as well as scheduling them for work.

The court further found that the topic of sexual harassment in the workplace “did not appear in the franchise documents at all.” Similarly, employee training documents provided by Domino's were limited to activities like pizza making, store operation, deliveries and safety precautions.

Yet Sui Juris owner Poff testified in a deposition that he felt more or less required to follow the advice of Domino's area leader Claudia Lee. He said he told Lee about the alleged sexual harassment and that she responded by telling him that he had to “get rid of” Miranda. Domino's director of franchise services Joseph Devereaux further testified that he couldn't rule out the possibility of the company providing sexual harassment training to a franchisee if a worker were accused of such behavior.

Nevertheless, the majority said it appeared that Sui Juris was in complete control with respect to training employees on how to interact with one another and on avoiding harassment. Poff testified that he created his own “zero tolerance” harassment policy and trained store workers on the topic. Patterson acknowledged that Poff told her to come to him directly with any harassment complaints.

The court also noted that Poff, not Domino's, suspended Miranda after Patterson complained about the harassment and conducted his own investigation into the matter. Although he said he wasn't able to confirm Patterson's allegations, Poff considered the matter closed when Miranda stopped showing up for work.

“Poff acted with the obvious understanding that the decision whether and how to discipline Miranda was his alone to make,” Baxter wrote. “He chose to proceed in a prudent and methodical way by investigating the complaint before a final decision was made.”

Bill Raises Possible Liability Issues

Baxter made clear that the decision wasn't intended to shield franchisers from liability for the sexual harassment of a franchisee worker under all circumstances.

“A franchisor will be liable if it has retained or assumed the right of general control over the relevant day-to-day operations at its franchised locations that we have described, and cannot escape liability in such a case merely because it failed or declined to establish a policy with regard to that particular conduct,” the judge wrote.

The franchiser-franchisee relationship could be in for significant changes, should Brown sign into law S.B. 610. Littler Mendelson's Lotito told Bloomberg BNA that the decision “sets a tone” for the governor to make sure that the state treats franchiser-franchisee relationships uniformly.

If signed, however, the law may spur franchisers to take a stronger role in the day-to-day operations of their franchisees because they will have less power to terminate relationships with underperforming businesses. That in turn could trigger more broad franchiser liability for franchisee activities, according to attorney Alexis S. McKenna of McKenna & Winer in Oakland, Calif.

“Assuming they do in fact want more control at the franchisee level, that may eventually change the court's analysis about the franchiser-franchisee relationship,” McKenna said. Her firm also represented Patterson in the litigation.

Dissent Wants ‘Factual Inquiry.'

Werdegar's dissent said the court should have allowed a jury to determine whether Domino's exercised the control necessary to be liable as an employer.

“That a franchisor is not automatically the employer of its franchisee's employees, irrespective of the details of the parties' relationship, necessarily follows,” Werdegar wrote. “So, too, does it follow that a franchisor may under the circumstances of the parties' relationship in fact be an employer,” the judge added. “The outcome depends on the factual inquiry.”

Here, Werdegar said there was sufficient evidence to raise a triable question about the nature of the franchiser-franchisee relationship. In addition to the Miranda decision, the judge noted that Poff testified during his deposition that Lee had strongly influenced his decision to fire another store employee, whom she told him was “hurting your franchise.”

“[I]f Domino's relationship with Poff gave it the power to force him to fire his employees, then those employees were subject not just to Poff's control but also to Domino's and thus were the employees of both,” the judge wrote. Judges Goodwin Liu and Victoria G. Chaney joined in the dissenting opinion.

Dell'Ario told Bloomberg BNA that he agrees with the dissent. He said the majority “cherry picked” provisions from the franchise agreement to support its decision without looking at the entire circumstance of the relationship. “They denied us the opportunity to put our case in front of the jury,” he said, adding that he intends to seek rehearing.

Dell'Ario of Dell'Ario and LeBoeuf PC in Napa, Calif., and McKenna represented Patterson. Domino's was represented by Mary-Christine Sungaila of Snell & Wilmer in Costa Mesa, Calif., and Elizabeth L. Kolar of Kolar & Associates in Santa Ana, Calif.

To contact the reporter on this story: Chris Opfer in Washington at copfer@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

Text of the opinion is available at http://op.bna.com/dlrcases.nsf/r?Open=copr-9nfm3k.

 

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