Court Watch

In holding Domino's could not be vicariously liable for the acts of its franchisees, the court noted that an analysis of the franchise relationship for vicarious liability purposes must steer away from California's historical application of agency principles to franchise relationships and instead accommodate the 'contemporary realities' of franchising: namely the franchisor's control over its trademarks and uniformity in operations coupled with the franchisee's control over the day-to-day operations, including the hiring and firing of employees and the regulation of workplace behavior. The court explained that uniformity standards imposed by the franchisor benefit both parties to the franchise relationship since system wide variations 'can affect product quality, customer service, trade name, business methods, public reputation, and commercial image.' The court held that the fact that the franchisor exercises such control over its franchisees to ensure uniformity could not alone reasonably constitute the control needed to support a vicarious liability claim.

With respect to the issue of franchisor liability for franchisee employment practices, the court acknowledged that most franchise agreements, including the agreement between Domino's and its franchisee in Patterson, 'allocate local personnel issues almost exclusively to the franchisee' and '[a] franchisor ' becomes potentially liable for actions of the franchisee's employees, only if it has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee's employees. Any other guiding principle would disrupt the franchise relationship.' Because Domino's did not maintain control over its franchisees' employment practices, the court held that Domino's could not be held liable for its franchisees' acts.

While the Patterson decision is encouraging to franchisors, it does not resolve the tensions faced by franchisors in light of the NLRB Office of the General Counsel's recent actions, nor is it clear how the opinion will apply to franchise and distribution models outside of the 'business format' model discussed by the court. The Patterson opinion is incredibly important to the sanctity of the franchise business model, however franchisors must remain committed to ensure their policies and procedures relate strictly to the protection of their trademarks and system and avoid involvement in the day-to-day operation of their franchisees' businesses.

Printed Names Without'Signatures Satisfy'Requirement That Personal'Guaranty Be Signed

Following a bench trial, the Federal District Court for the Central District of California recently upheld a personal guaranty that included hand-printed names of the guarantors, but not their signatures, and awarded $205,083 in damages against them for breach of contract. Degla Group for Investments Inc. v. BoConcept USA, Inc., 2014 Cal. LEXIS 110028 (C.D. Cal. Aug. 8, 2014).

BoConcept is a Danish company in the business of selling furniture and accessories. It has franchised stores in at least 10 countries, including the United States. In 2005, Hussein Sidky began talking with BoConcept about becoming a franchisee. In 2006, Hussein Sidky, Hasan Sidky, and their cousin Hassan Morshedy (the Sidkys) formed a company, Degla, for the purpose of operating a BoConcepts franchise in California and began negotiating a franchise agreement with BoConcepts.

Section 5(Q) of BoConcepts' standard franchise agreement provided that '[a]ll amounts due to the Company and its affiliates shall be and are personally guaranteed by all individual owners of the entity operating the Franchised Business.' Hussein Sidky testified that he told BoConcepts that he would not agree to a personal guaranty. BoConcepts responded that it would only remove the personal guaranty provision if the Sidkys provided an irrevocable bank guaranty for an amount equal to the estimated monthly break-even point for the business. The Sidkys did not respond to that statement, did not provide a bank guaranty, and did not express further disagreement with Section 5(Q).

In early 2007, the parties signed the franchise agreement. Section 5(Q) was included in the agreement. The agreement also included an Acknowledgment section, which stated: 'The following persons (the 'Principals') represent all individuals that hold an interest in Franchisee, directly or indirectly. By signing this acknowledgment, the Principals consent to the execution of this Agreement by Franchisee, and agree to be bound by those terms of the Agreement that relate to their duties and obligations as Principals.' On the lines below the Acknowledgment, each of the three Degla owners hand-printed their names but did not add their signatures. Hussein Sidky testified that he wrote his name to identify himself as an owner, but he did not sign his name because his attorney had advised him not to sign a personal guaranty.

After the Sidkys opened their franchised store, they began having disagreements with BoConcepts about the operation of the business. They also became delinquent in their payments to BoConcepts. In June 2009, BoConcepts sent the franchisee a termination notice.

BoConcepts' breach of contract claim, requesting damages for unpaid invoices, was tried to the court. The Sidkys argued that only their corporation, Degla, and the individuals, were parties to the franchise agreement, and that they were not bound by the personal guaranty. The court found that whether any of the individuals were parties to the franchise agreement did not matter, because they were all liable for the debt to BoConcepts under the personal guaranty.

Under Kansas law, personal guarantees are subject to the statute of frauds, which requires that the provision be in writing and be signed by the guarantor in order to be enforceable. Further, a signature 'may be by mark, initials, typewriter, print or stamp, or any other symbol if by placing the symbol on the document the person do doing intended the symbol to be a binding signature.' Under this law, the court determined that the guaranty was in writing and that the printed names could constitute signatures.

The court then considered whether the Sidkys intended their hand-printed names to be binding signatures and concluded that they did. First, the acknowledgment contained the phrase, 'by signing this acknowledgment '.' The court found it reasonable to infer that when they printed their names after this statement, they were agreeing to be bound. In addition, the Sidkys knew that Section 5(Q) and the Acknowledgement were in the franchise agreement and never mentioned to BoConcepts that they did not intend for their names to be construed as signatures or crossed out any part of Section 5(Q) or the Acknowledgment. They also knew that BoConcepts would not enter into a franchise agreement without either a personal guaranty or bank guarantees. They printed their names in the Acknowledgment, with this knowledge, in order to enter into the franchise agreement. This circumstantial evidence was sufficient to find intent to sign the guaranty. Thus, the Sidkys were found to be personally liable for the debt owed by Degla to BoConcepts.

Although it is always a good practice for franchisors to make sure that all parts of the franchise agreement, including any personal guarantees or acknowledgment sections, are fully completed and signed, it is comforting to know that courts will not allow franchisees and their owners to escape liability through creative arguments about intent. In this case, the discussions prior to signing the franchise agreement, in which the franchisor explained that a personal guaranty or bank guaranty was required to enter into a franchise agreement, and the franchisee did not respond, were critical pieces of circumstantial evidence that aided the franchisor.

Cynthia M. Klaus is a shareholder and Susan E. Tegt is an associate with Larkin Hoffman. Ms. Klaus can be contacted at [email protected], and Ms. Tegt can be contacted at [email protected].

Franchisor's Control over'System Uniformity'Insufficient to Show'Vicarious Liability

The recent and long-awaited opinion from the California Supreme Court in Patterson v. Domino's Pizza, LLC, 2014 Cal. LEXIS 6251 (Cal. Aug. 28, 2014), clarifies the circumstances under which a franchisor may be liable for the employment practices of its franchisees under California law, helping to calm the nerves of franchisors in the wake of the National Labor Relations Board (NLRB) General Counsel's July 2014 determination that the NLRB will pursue claims against McDonald's under joint-employer liability theory. See, 'NLRB: McDonald's Is Joint Employer With Franchisees,' Franchising Business & Law Alert, Sept. 2014. Unlike the NLRB's recent determination, the California Supreme Court, in a sharply divided decision, determined that a franchisor's exercise of control over its franchisees to ensure system uniformity is not alone sufficient control that would be necessary to hold a franchisor vicariously liable for the acts of its franchisees. Since the Patterson decision comes from the highest court in California, its holding may resonate to other forums outside of the state. However, the divided 4-3 opinion in Patterson, coupled with the clear unrest in this area of law in recent months, means franchisors would be premature to breathe a sigh of relief in the wake of this opinion.

In Patterson, a male supervisor employed by a Domino's Pizza' franchisee subjected a female subordinate employee to repeated sexual harassment. The victim plaintiff sued the individual harasser, the franchisee, and the franchisor, Domino's Pizza, LLC, Domino's Pizza Franchising, LLC, and Domino's Pizza, Inc. (collectively Domino's or the franchisor) claiming that the franchisor was the 'employer' of the persons working for the franchisee and because the franchisee was the 'agent' of the franchisor. The trial court granted summary judgment in favor of the franchisor and the Court of Appeal reversed. The California Supreme Court granted review to 'address the novel question dividing the lower courts in this case: Does a franchisor stand in an employment or agency relationship with the franchisee and its employees for purposes of holding it vicariously liable for workplace injuries allegedly inflicted by one employee of a franchisee while supervising another employee of the franchisee?' The court held that under most contemporary franchise models, it does not.

In holding Domino's could not be vicariously liable for the acts of its franchisees, the court noted that an analysis of the franchise relationship for vicarious liability purposes must steer away from California's historical application of agency principles to franchise relationships and instead accommodate the 'contemporary realities' of franchising: namely the franchisor's control over its trademarks and uniformity in operations coupled with the franchisee's control over the day-to-day operations, including the hiring and firing of employees and the regulation of workplace behavior. The court explained that uniformity standards imposed by the franchisor benefit both parties to the franchise relationship since system wide variations 'can affect product quality, customer service, trade name, business methods, public reputation, and commercial image.' The court held that the fact that the franchisor exercises such control over its franchisees to ensure uniformity could not alone reasonably constitute the control needed to support a vicarious liability claim.

With respect to the issue of franchisor liability for franchisee employment practices, the court acknowledged that most franchise agreements, including the agreement between Domino's and its franchisee in Patterson, 'allocate local personnel issues almost exclusively to the franchisee' and '[a] franchisor ' becomes potentially liable for actions of the franchisee's employees, only if it has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee's employees. Any other guiding principle would disrupt the franchise relationship.' Because Domino's did not maintain control over its franchisees' employment practices, the court held that Domino's could not be held liable for its franchisees' acts.

While the Patterson decision is encouraging to franchisors, it does not resolve the tensions faced by franchisors in light of the NLRB Office of the General Counsel's recent actions, nor is it clear how the opinion will apply to franchise and distribution models outside of the 'business format' model discussed by the court. The Patterson opinion is incredibly important to the sanctity of the franchise business model, however franchisors must remain committed to ensure their policies and procedures relate strictly to the protection of their trademarks and system and avoid involvement in the day-to-day operation of their franchisees' businesses.

Printed Names Without'Signatures Satisfy'Requirement That Personal'Guaranty Be Signed

Following a bench trial, the Federal District Court for the Central District of California recently upheld a personal guaranty that included hand-printed names of the guarantors, but not their signatures, and awarded $205,083 in damages against them for breach of contract. Degla Group for Investments Inc. v. BoConcept USA, Inc., 2014 Cal. LEXIS 110028 (C.D. Cal. Aug. 8, 2014).

BoConcept is a Danish company in the business of selling furniture and accessories. It has franchised stores in at least 10 countries, including the United States. In 2005, Hussein Sidky began talking with BoConcept about becoming a franchisee. In 2006, Hussein Sidky, Hasan Sidky, and their cousin Hassan Morshedy (the Sidkys) formed a company, Degla, for the purpose of operating a BoConcepts franchise in California and began negotiating a franchise agreement with BoConcepts.

Section 5(Q) of BoConcepts' standard franchise agreement provided that '[a]ll amounts due to the Company and its affiliates shall be and are personally guaranteed by all individual owners of the entity operating the Franchised Business.' Hussein Sidky testified that he told BoConcepts that he would not agree to a personal guaranty. BoConcepts responded that it would only remove the personal guaranty provision if the Sidkys provided an irrevocable bank guaranty for an amount equal to the estimated monthly break-even point for the business. The Sidkys did not respond to that statement, did not provide a bank guaranty, and did not express further disagreement with Section 5(Q).

In early 2007, the parties signed the franchise agreement. Section 5(Q) was included in the agreement. The agreement also included an Acknowledgment section, which stated: 'The following persons (the 'Principals') represent all individuals that hold an interest in Franchisee, directly or indirectly. By signing this acknowledgment, the Principals consent to the execution of this Agreement by Franchisee, and agree to be bound by those terms of the Agreement that relate to their duties and obligations as Principals.' On the lines below the Acknowledgment, each of the three Degla owners hand-printed their names but did not add their signatures. Hussein Sidky testified that he wrote his name to identify himself as an owner, but he did not sign his name because his attorney had advised him not to sign a personal guaranty.

After the Sidkys opened their franchised store, they began having disagreements with BoConcepts about the operation of the business. They also became delinquent in their payments to BoConcepts. In June 2009, BoConcepts sent the franchisee a termination notice.

BoConcepts' breach of contract claim, requesting damages for unpaid invoices, was tried to the court. The Sidkys argued that only their corporation, Degla, and the individuals, were parties to the franchise agreement, and that they were not bound by the personal guaranty. The court found that whether any of the individuals were parties to the franchise agreement did not matter, because they were all liable for the debt to BoConcepts under the personal guaranty.

Under Kansas law, personal guarantees are subject to the statute of frauds, which requires that the provision be in writing and be signed by the guarantor in order to be enforceable. Further, a signature 'may be by mark, initials, typewriter, print or stamp, or any other symbol if by placing the symbol on the document the person do doing intended the symbol to be a binding signature.' Under this law, the court determined that the guaranty was in writing and that the printed names could constitute signatures.

The court then considered whether the Sidkys intended their hand-printed names to be binding signatures and concluded that they did. First, the acknowledgment contained the phrase, 'by signing this acknowledgment '.' The court found it reasonable to infer that when they printed their names after this statement, they were agreeing to be bound. In addition, the Sidkys knew that Section 5(Q) and the Acknowledgement were in the franchise agreement and never mentioned to BoConcepts that they did not intend for their names to be construed as signatures or crossed out any part of Section 5(Q) or the Acknowledgment. They also knew that BoConcepts would not enter into a franchise agreement without either a personal guaranty or bank guarantees. They printed their names in the Acknowledgment, with this knowledge, in order to enter into the franchise agreement. This circumstantial evidence was sufficient to find intent to sign the guaranty. Thus, the Sidkys were found to be personally liable for the debt owed by Degla to BoConcepts.

Although it is always a good practice for franchisors to make sure that all parts of the franchise agreement, including any personal guarantees or acknowledgment sections, are fully completed and signed, it is comforting to know that courts will not allow franchisees and their owners to escape liability through creative arguments about intent. In this case, the discussions prior to signing the franchise agreement, in which the franchisor explained that a personal guaranty or bank guaranty was required to enter into a franchise agreement, and the franchisee did not respond, were critical pieces of circumstantial evidence that aided the franchisor.

Cynthia M. Klaus is a shareholder and Susan E. Tegt is an associate with Larkin Hoffman. Ms. Klaus can be contacted at [email protected], and Ms. Tegt can be contacted at [email protected].