Court Watch

An important advantage of establishing a franchise system, as opposed simply to licensing one's intellectual property and know-how, is that it permits the franchisor to exercise significant commercial control over its franchisees while also being insulated from liability. Two recent cases demonstrate and help to clarify this advantage.

Domino's Pizza

In Domino's Pizza, LLC v. Reddy, Bus. Franchise Guide ' 15,501 (Tx. Ct. App. Mar. 19, 2015), one person was killed and another injured when a car driven by a Domino's Pizza delivery driver hydroplaned due to a bald tire and crashed into another vehicle. The guardian of the estates of the injured victim and deceased victim sued the driver, MAC Pizza Management, Inc., a Domino's franchisee, and Domino's itself for negligence. After a trial, the jury returned a verdict in favor of the crash victims, determining that the driver was 10% at fault, MAC was 30% at fault, and Domino's was 60% at fault.

Domino's appealed the verdict, alleging that the jury was legally precluded from finding that Domino's was negligent because Domino's owed no duty to the crash victims. Domino's asserted that the franchise agreement between it and MAC expressly established that the relationship between the parties was that of an independent contractor, and that Domino's had no right to control the day-to-day operations of the MAC franchise location at which the delivery driver worked.

Despite the plaintiff's efforts to establish a stronger relationship between Domino's and MAC than that of an independent contractor, the appellate court was not persuaded, and it ultimately reversed the jury verdict and dismissed the claims against Domino's.

Notwithstanding the fact that Domino's had on-demand access to MAC's books and client data, and the fact the Domino's established operating procedures and required MAC employees to wear Domino's-branded apparel, the court concluded that these controls, present in most franchise systems, did not render the stated independent contractor relationship a sham or otherwise create a duty of care as between Domino's and the crash victims.

Avis Car Rental

In contrast, the federal district court in Ambrose v. Avis Rent a Car Sys. Inc., Bus. Franchise Guide ' 15,518 (C.D. Cal. Dec. 8, 2014), denied Avis's motion for summary judgment even where the relationship between the plaintiffs and defendant functioned as an ersatz franchise relationship, and where the agreement between the parties expressly defined the relationship as that of an independent contractor. In Avis , a class of plaintiffs entered into agreements with Avis, a car rental company, which provided that the plaintiffs would operate Avis locations that had previously been company stores. The Avis agreements promised to provide the plaintiffs with completely furnished “turnkey operation[s.]” According to the operating agreements, the plaintiffs were not to be considered franchisees; but the agreements did expressly define the relationship between the parties as that of an independent contractor.

The plaintiffs, analyzing these agreements, surmised that the relationship between the plaintiffs and Avis was not that of an independent contractor, but rather an employer-employee relationship due to the agreements' express disclaimer of a franchise relationship and the commercial controls the agreements conferred to Avis. Accordingly, the plaintiffs sued Avis under California employment law for failure to pay overtime compensation, failure to pay compensation at the time of termination, failure to allow and pay for meal and rest breaks, and a variety of other employment violations.

On summary judgment, Avis contended that, in all respects except for payment of a franchise fee, the plaintiff's relationship with Avis was that of a franchise, and the California Supreme Court, in Domino's Pizza v. Patterson, 60 Cal. 4th 474 (2014), had established that franchisor-franchisee relationships are to be understood as independent contractor relationships. Moreover, the agreement the plaintiffs signed with Avis expressly stated that they were “solely responsible” for the behaviors of the plaintiffs' employees. Despite the fact that the deal also stated that the plaintiffs were “not ' franchisee[s],” due to this relationship being “functionally indistinguishable” from that of a franchisee, Avis asserted that the plaintiffs were not Avis employees and that Avis had committed no employment violations against them.

Ruling on Avis's motion for summary judgment, the court concluded that a reasonable jury could find that the relationship between the plaintiff and Avis was an employer-employee relationship. Because the Avis agreements created ambiguity as to the plaintiffs' status by disclaiming the franchise relationship and allowing for significant business controls while alleging an independent contractor relationship, the court did not permit Avis to resolve that ambiguity in its favor at summary judgment and therefore denied Avis's motion and permitted the action to proceed.

Conclusion

These cases teach two valuable lessons to potential and current franchisors. First, franchise systems offer the opportunity for a great deal of operational control to franchisors, while still insulating them to some degree from liability for acts of their franchisees' employees. Second, businesses should embrace, franchise systems, and carefully draft agreements to avail themselves of such controls and protections. Although the law, absent extreme facts, is arguably settled on independent contractor status in the franchisor-franchisee relationship, courts will permit actions to proceed where there is some doubt as to the relationship between the parties.

Zach Eyster is a member of the franchise team at Kilpatrick Townsend & Stockton. He can be reached at [email protected].

An important advantage of establishing a franchise system, as opposed simply to licensing one's intellectual property and know-how, is that it permits the franchisor to exercise significant commercial control over its franchisees while also being insulated from liability. Two recent cases demonstrate and help to clarify this advantage.

Domino's Pizza

In Domino's Pizza, LLC v. Reddy, Bus. Franchise Guide ' 15,501 (Tx. Ct. App. Mar. 19, 2015), one person was killed and another injured when a car driven by a Domino's Pizza delivery driver hydroplaned due to a bald tire and crashed into another vehicle. The guardian of the estates of the injured victim and deceased victim sued the driver, MAC Pizza Management, Inc., a Domino's franchisee, and Domino's itself for negligence. After a trial, the jury returned a verdict in favor of the crash victims, determining that the driver was 10% at fault, MAC was 30% at fault, and Domino's was 60% at fault.

Domino's appealed the verdict, alleging that the jury was legally precluded from finding that Domino's was negligent because Domino's owed no duty to the crash victims. Domino's asserted that the franchise agreement between it and MAC expressly established that the relationship between the parties was that of an independent contractor, and that Domino's had no right to control the day-to-day operations of the MAC franchise location at which the delivery driver worked.

Despite the plaintiff's efforts to establish a stronger relationship between Domino's and MAC than that of an independent contractor, the appellate court was not persuaded, and it ultimately reversed the jury verdict and dismissed the claims against Domino's.

Notwithstanding the fact that Domino's had on-demand access to MAC's books and client data, and the fact the Domino's established operating procedures and required MAC employees to wear Domino's-branded apparel, the court concluded that these controls, present in most franchise systems, did not render the stated independent contractor relationship a sham or otherwise create a duty of care as between Domino's and the crash victims.

Avis Car Rental

In contrast, the federal district court in Ambrose v. Avis Rent a Car Sys. Inc., Bus. Franchise Guide ' 15,518 (C.D. Cal. Dec. 8, 2014), denied Avis's motion for summary judgment even where the relationship between the plaintiffs and defendant functioned as an ersatz franchise relationship, and where the agreement between the parties expressly defined the relationship as that of an independent contractor. In Avis , a class of plaintiffs entered into agreements with Avis, a car rental company, which provided that the plaintiffs would operate Avis locations that had previously been company stores. The Avis agreements promised to provide the plaintiffs with completely furnished “turnkey operation[s.]” According to the operating agreements, the plaintiffs were not to be considered franchisees; but the agreements did expressly define the relationship between the parties as that of an independent contractor.

The plaintiffs, analyzing these agreements, surmised that the relationship between the plaintiffs and Avis was not that of an independent contractor, but rather an employer-employee relationship due to the agreements' express disclaimer of a franchise relationship and the commercial controls the agreements conferred to Avis. Accordingly, the plaintiffs sued Avis under California employment law for failure to pay overtime compensation, failure to pay compensation at the time of termination, failure to allow and pay for meal and rest breaks, and a variety of other employment violations.

On summary judgment, Avis contended that, in all respects except for payment of a franchise fee, the plaintiff's relationship with Avis was that of a franchise, and the California Supreme Court, in Domino's Pizza v. Patterson , 60 Cal. 4th 474 (2014), had established that franchisor-franchisee relationships are to be understood as independent contractor relationships. Moreover, the agreement the plaintiffs signed with Avis expressly stated that they were “solely responsible” for the behaviors of the plaintiffs' employees. Despite the fact that the deal also stated that the plaintiffs were “not ' franchisee[s],” due to this relationship being “functionally indistinguishable” from that of a franchisee, Avis asserted that the plaintiffs were not Avis employees and that Avis had committed no employment violations against them.

Ruling on Avis's motion for summary judgment, the court concluded that a reasonable jury could find that the relationship between the plaintiff and Avis was an employer-employee relationship. Because the Avis agreements created ambiguity as to the plaintiffs' status by disclaiming the franchise relationship and allowing for significant business controls while alleging an independent contractor relationship, the court did not permit Avis to resolve that ambiguity in its favor at summary judgment and therefore denied Avis's motion and permitted the action to proceed.

Conclusion

These cases teach two valuable lessons to potential and current franchisors. First, franchise systems offer the opportunity for a great deal of operational control to franchisors, while still insulating them to some degree from liability for acts of their franchisees' employees. Second, businesses should embrace, franchise systems, and carefully draft agreements to avail themselves of such controls and protections. Although the law, absent extreme facts, is arguably settled on independent contractor status in the franchisor-franchisee relationship, courts will permit actions to proceed where there is some doubt as to the relationship between the parties.

Zach Eyster is a member of the franchise team at Kilpatrick Townsend & Stockton. He can be reached at [email protected].