In a closely watched case with far-reaching implications, the California Supreme Court determined that Domino’s Pizza, the franchisor, should not be held liable for the alleged sexual harassment by an employee of one of its franchisees. The lengthy, well-reasoned decision gave great weight to the contemporary realities of the franchise business model and the unique nature of franchising. Noting how franchising has become such an important and thriving part of our economy, the Court followed the modern, enlightened view and rejected the reasoning of the old line of cases that found a franchisor vicariously liable for acts of its franchisees based on the degree of control they exercised over their franchisees.

Among the important factors that the Court considered in determining that Domino’s was not the employer of the franchisee’s employees were that the franchisee: (a) implemented day-to-day operational standards for the business: (b) hired, fired, and disciplined its employees; (c) regulated workplace behavior; and (d) was a completely different company from the franchisor. The Court also looked to the franchise agreement that described the parties as independent contractors and stated that Domino’s was not liable for damages arising out of the operation of the store.

The Court recognized how important it is for franchisors to impose comprehensive, uniform standards in order to effectively market their brand and protect their trademarks. Since these controls benefit both parties by building customer trust with consistency and uniformity, the Court reasoned that they should not be used to automatically saddle the franchisor with responsibility for employees of the franchisee.

The stature of the California Supreme Court as one of the nation’s most influential and innovative state courts may well influence judges throughout the country. Other courts should take notice in recognizing that franchising is unique and that holding franchisors liable for the wrongful acts of franchisees and their employees can have a profoundly negative impact on the franchise industry and the economy.

Patterson v. Domino’s Pizza, LLC, et. al, S20543, Ct. App. 2/6 B235099 (August 28, 2014)