Bundy Law Firm PLLC June 19, 2012

In a continuing effort to highlight important new court decisions, this time regarding vicarious liability of a franchisor for the actions of its franchisee, you need to be aware of Patterson v. Domino’s Pizza.  In the Patterson case, which had been dismissed by the trial court, the California Court of Appeal reversed, saying:  “a franchisor’s actions speak louder than words.” 

The case involved claims of sexual harassment of a young employee by her manager.  After the litigation started, the franchisee filed for bankruptcy.  That left the franchisor as the primary defendant.  The franchisor argued that, because the contract said the franchisee was an independent contractor, the franchisor had no liability. 

The Court of Appeal decided that it had to look beyond the contract to determine whether the franchisor had and exercised sufficient controls over the details of the franchisee’s operations to create liability.  The court seemed impressed by testimony from the franchisee that Dominos forced him to fire the accused employee–suggesting the consequences of not complying with the demand would have been substantial. 

The case bears reading by every franchisor.  It is food for thought every time a franchisor feels the desire to exercise detailed control over major aspects of a franchisee’s operation.  It is yet another signal that courts are going to look beyond the words of the franchise agreement and examine the facts on the ground–how the parties actually behave and operate within the context of the contract. 

Much of the vicarious liability case law, often finding no vicarious liability of franchisors, comes from earlier days of franchising.  As franchisors and their advisors try to write the “perfect contract” and as franchisors seek greater and greater control, the courts may expand that field of liability–where it seems appropriate because the franchisor had the power to prevent the act from happening. 

One decision does not indicate a sea change.  However, it would be a worthwhile exercise for every franchisor to consult with their franchise attorneys about this trend toward vicarious liability and what steps it can and should take to minimize the risk of being held responsible for something bad done by an employee of a franchisee.