The California Supreme Court will decide whether the terms of a franchise agreement, or the franchisor’s conduct at-odds with that agreement, govern for purposes of whether the franchisor can face liability for (mis-)treatment of a franchisee’s employee.

The issue is simpler than it sounds, but an opinion could have wide-ranging implications for franchisors doing business in California.  In Patterson v. Domino’s Pizza, a 16 year-old employee of a Domino’s franchise sued, not only the franchisee and its manager, but also Domino’s, for alleged sexual harassment, retaliation and constructive wrongful termination.  The franchisee petitioned for bankruptcy protection and Domino’s obtained summary judgment on the grounds that the operative franchise agreement placed sole responsibility for recruiting, hiring, training and supervising employees on the franchisee, such that the franchisee was an independent contractor for liability purposes.

In June, 2012, the California Court of Appeal for the Second District issued and certified for publication an opinion that reversed the summary judgment in Domino’s favor.  In a nutshell, the Court of Appeal looked well outside the terms of the franchise agreement, focusing instead on the course of conduct between Domino’s and its franchisee.  Among the items of evidence cited by the court was Domino’s specific hiring requirements applicable to all franchisees, including rules about qualifications, appearance standards and required training software programs.  The court also pointed to testimony from the franchisee owner about Domino’s practices, including specific direction to fire certain franchisee employees (including the alleged harasser) and tactics, including “mystery shoppers,” designed to exert control over individual franchise stores.  Triable issues remained, the Court of Appeal concluded, whether “there was a lack of local franchisee management independence” which could render Domino’s liable.

Accepting Domino’s petition for review, the Supreme Court has ordered the parties to limit analysis to the question whether Domino’s is entitled to summary judgment on plaintiff’s claim that it is vicariously liable for tortious conduct by a supervising employee of the franchisee.

If the Supreme Court’s opinion is unfavorable to Domino’s, it could change in a very material way the degree of control franchisors maintain over their franchisee’s employment practices.  If it results in a shifting of responsibility to the franchisor, I imagine it will increase franchise purchase costs, trigger different or additional insurance provisions, with corresponding cost increases, and overall make franchise arrangements less appealing in our golden state.