Court Watch

The trial court, and later the appellate court, found that Domino's right to dictate various “baseline” standards and requirements that its franchisees were required to follow were in furtherance of their right and duty to protect their trademarks and comply with federal trademark law. As such, these requirements did not create an agency relationship. However, a franchisor's vicarious liability for actions of its franchisee may exist where the franchisor controls, or has the right to control, the specific policy or practice that resulted in the alleged damage.

Acknowledging that the “specific policy or practice resulting in harm to the plaintiff is difficult to ascertain in a context such as here where the harm was caused by a third party acting malevolently,” the court defined the specific policy or practice in this case as that involving early morning deliveries. While Domino's mandated that the franchised store had to remain open for business until 1:00 a.m. on Fridays and Saturdays, it was up to the franchisee whether to remain open and make deliveries later and to establish its own safety policies during its extended hours. Domino's Franchise Agreement and “Delivery Area Security Procedure Manual,” the latter issued in response to a Department of Justice (DOJ) action concerning Domino's policies limiting delivery areas out of security concerns, required franchisees in general to deliver all orders but left it to each franchisee whether to deliver under circumstances that appeared dangerous.

The plaintiffs alleged that various specific requirements imposed by the franchisor ' an employee could not carry a weapon, had to carry less than $20, could not to resist a robbery attempt, must wear a Domino's uniform and have a car-top illuminated Domino's sign ' made the delivery person more of a target. The court found that the uniform and sign requirements were for the protection of the trademark and that the others did not, in and of themselves, place employees more at risk, even though they were specified more for employee safety than trademark protection. While it is true that dipping into the area of employee safety edged closer to having the right to control the policy and practices that led to the harm alleged here, there was no evidence that those policies contributed to the harm suffered by Lind. Most of the training and policies involving employee safety issues were left to the franchisee and were not specified or dictated by Domino's. The franchisee had the right to decide whether to remain open later than required by the Franchise Agreement, whether to deliver to dangerous areas or suspicious patrons, and to design and implement safety protocols over and above those prescribed by Domino's.

As in most Franchise Agreements, the Domino's agreement provided a “catch-all” requiring that franchisees “comply with all specifications, standards and operating procedures prescribed by Domino's.” The plaintiffs argued that this provision on its own created a triable issue of fact whether Domino's had the right to control delivery policy. The court held that this provision only gave Domino's the right to require compliance with provisions set out more specifically elsewhere in the Franchise Agreement and was not a provision giving Domino's the right to add additional terms, an interpretation with which few franchisors would probably agree. However, here that interpretation, and the disclaiming of an agency relationship in the Franchise Agreement (something that was “informative but not dispositive”), did not create a triable issue of fact regarding Domino's rights and duties sufficient to defeat a motion for summary judgment.

The claim of direct negligence was defeated on more or less the same basis as the vicarious liability claim; the court finding that Domino's did not have a direct duty to protect the franchisee's employees since it did not exercise direct control of the daily operations over the franchised store other than as necessary to protect its trademark.

As the trend continues trying to classify franchisors as “joint-employers” of their franchisees' employees for various activities and inactions, one wonders whether, and if so to what extent, joint-employer theories will be used to try to extend vicarious liability theories to franchisors where that liability would not have previously been found. It can be hoped that a reality-based analysis will be undertaken to determine whether franchisor liability is justified rather than trying to find a deep pocket from which to compensate a loss that would otherwise not be, or would be inadequate recompense based merely on a label.

Franchisor That Sleeps on Its Rights May Not Be Able to Enforce Them

Maaco, the franchisor of automobile paint and body shops, sought a preliminary injunction against a former franchisee that did not comply with all of its post-termination duties. In Maaco Franchising, LLC v. Ghirimoldi, et al, Bus. Franchise Guide (CCH) ' 15,571 (USDC W.D. North Carolina, July 28, 2015), the court denied Maaco's motion for a preliminary injunction based on a delay of over two years between the Franchise Agreement's termination and the filing of the action of which the motion was a part.

The franchisee became unhappy with the franchisor shortly after the Franchise Agreement was signed. A notice of default was sent to the franchisee in November 2012, after the franchisee stopped paying royalties and other sums. The defaults were not cured and in December 2012, a notice of termination was sent ending the franchise relationship.

As is typical, the Franchise Agreement specified several duties that the franchisee was required to perform after the agreement was terminated, including ceasing to use all names, marks and signs, returning all manuals, and ending the franchisee's right to use all telephone numbers and listings. A covenant not to compete prohibited the franchisee from continuing in the same business after the Franchise Agreement ended. After receiving the notice of termination, the franchisee continued in the same business and continued to use the same telephone number. It removed or obscured the name “Maaco” from its signs, but used a sign identifying its shop as “America Body Shop.” Maaco claimed rights in the name “America's Body Shop” which is used as part of the franchised shop's identification ' the franchisee merely removed the “s.” The franchisee “put away” Maaco's manuals but did not return them.

Maaco took no action to enforce its rights, nor even to communicate with the former franchisee, until the filing of the instant lawsuit over two years after the Franchise Agreement was terminated. To grant the extraordinary remedy of a preliminary injunction, the moving party must show, among other things, that it is likely to suffer irreparable harm in the absence of the requested relief. Maaco did not present evidence that that it lost customers as a result of the alleged trademark infringement or suffered a loss of goodwill during the long delay in seeking to enforce its rights. The court pointed out that if these results did not occur in the over two years it took to bring this action, it is not credible that they are now imminent or likely. Maaco also did not show that it tried to establish another facility in the concerned area during that period or was dissuaded from doing so by the continued operation of the defendant's shop in violation of the noncompetition covenant.

Important to the trademark infringement claim was that the name “America's Body Shop” was denied registration on the Principal Register of the United States Patent and Trademark Office, since it was found to be descriptive, a conclusion that prevents protection of a mark. Such a mark can be registered on the Supplemental Register and will be registered on the Principal Register if it can be shown at a later time that it has come to have a “secondary meaning” ' identification in the mind of the public as the source of a product or service, a standard that had not yet been met by Maaco. The latter also alleged that the shop's telephone number deserved trademark protection, a claim the court rejected.

The court refused to enjoin the continued operation of the defendant's shop since, under North Carolina law, an injunction to enforce a covenant against competition will not be issued if the moving party itself breached the contract in a substantial and material manner that “goes to the heart of the agreement.” Whether Maaco's alleged breaches met that standard is up to a jury, said the court, and therefore Maaco has not shown it is likely to succeed on the merits of the case, a prerequisite for the granting of an injunction. Similarly, Maaco's delay in bringing the action weighs against it in a balancing of the hardships since the hardship that would be suffered by the defendant is much greater two and a half years after the franchise termination than it would have been if the matter had been filed promptly.

Maaco did not explain why it did not take action sooner, but it clearly is paying the price for not doing so.

Darryl A. Hart is an attorney with Bartko, Zankel, Bunzel & Miller in San Francisco.

Summary Judgment for Domino's in Death of Franchisee's Employee: Will It Last?

Lind, et al v. Domino's Pizza LLC, et al, Bus. Franchise Guide (CCH) ' 15,567 (Appeals Court of Massachusetts, Hampden, July 29, 2015), is a case in which a Massachusetts intermediate appellate court affirmed the grant of summary judgment in favor of the defendant Domino's Pizza entities in a wrongful death action brought by the administrators of the estate of a Domino's franchisee's employee who was kidnapped, robbed and murdered during a late-night pizza delivery. Various theories of liability were proffered by the plaintiffs, including vicarious liability, negligence and contractual third-party beneficiary claims. Just before trial, the trial court granted the defendants' motion for summary judgment on all issues and the plaintiffs appealed.

Corey Lind was an employee of the Boston Road Domino's franchise in Springfield, MA. In response to a 2:30 a.m. telephone order, Lind was dispatched to make a delivery. After some confusion as to the exact address, including call-backs to the person who placed the order, Lind left after 3:00 a.m. on the fateful delivery, never to be seen alive again. Lind's parents, as co-administrators of his estate, brought an action against Domino's Pizza LLC, the franchisor, and Domino's Pizza, Inc., claiming Domino's, as the franchisor of the Boston Road store, was vicariously liable for Lind's death since the Domino's Franchise Agreement gave the franchisor the right to control the policies and practices that led to Lind's murder.

The trial court, and later the appellate court, found that Domino's right to dictate various “baseline” standards and requirements that its franchisees were required to follow were in furtherance of their right and duty to protect their trademarks and comply with federal trademark law. As such, these requirements did not create an agency relationship. However, a franchisor's vicarious liability for actions of its franchisee may exist where the franchisor controls, or has the right to control, the specific policy or practice that resulted in the alleged damage.

Acknowledging that the “specific policy or practice resulting in harm to the plaintiff is difficult to ascertain in a context such as here where the harm was caused by a third party acting malevolently,” the court defined the specific policy or practice in this case as that involving early morning deliveries. While Domino's mandated that the franchised store had to remain open for business until 1:00 a.m. on Fridays and Saturdays, it was up to the franchisee whether to remain open and make deliveries later and to establish its own safety policies during its extended hours. Domino's Franchise Agreement and “Delivery Area Security Procedure Manual,” the latter issued in response to a Department of Justice (DOJ) action concerning Domino's policies limiting delivery areas out of security concerns, required franchisees in general to deliver all orders but left it to each franchisee whether to deliver under circumstances that appeared dangerous.

The plaintiffs alleged that various specific requirements imposed by the franchisor ' an employee could not carry a weapon, had to carry less than $20, could not to resist a robbery attempt, must wear a Domino's uniform and have a car-top illuminated Domino's sign ' made the delivery person more of a target. The court found that the uniform and sign requirements were for the protection of the trademark and that the others did not, in and of themselves, place employees more at risk, even though they were specified more for employee safety than trademark protection. While it is true that dipping into the area of employee safety edged closer to having the right to control the policy and practices that led to the harm alleged here, there was no evidence that those policies contributed to the harm suffered by Lind. Most of the training and policies involving employee safety issues were left to the franchisee and were not specified or dictated by Domino's. The franchisee had the right to decide whether to remain open later than required by the Franchise Agreement, whether to deliver to dangerous areas or suspicious patrons, and to design and implement safety protocols over and above those prescribed by Domino's.

As in most Franchise Agreements, the Domino's agreement provided a “catch-all” requiring that franchisees “comply with all specifications, standards and operating procedures prescribed by Domino's.” The plaintiffs argued that this provision on its own created a triable issue of fact whether Domino's had the right to control delivery policy. The court held that this provision only gave Domino's the right to require compliance with provisions set out more specifically elsewhere in the Franchise Agreement and was not a provision giving Domino's the right to add additional terms, an interpretation with which few franchisors would probably agree. However, here that interpretation, and the disclaiming of an agency relationship in the Franchise Agreement (something that was “informative but not dispositive”), did not create a triable issue of fact regarding Domino's rights and duties sufficient to defeat a motion for summary judgment.

The claim of direct negligence was defeated on more or less the same basis as the vicarious liability claim; the court finding that Domino's did not have a direct duty to protect the franchisee's employees since it did not exercise direct control of the daily operations over the franchised store other than as necessary to protect its trademark.

As the trend continues trying to classify franchisors as “joint-employers” of their franchisees' employees for various activities and inactions, one wonders whether, and if so to what extent, joint-employer theories will be used to try to extend vicarious liability theories to franchisors where that liability would not have previously been found. It can be hoped that a reality-based analysis will be undertaken to determine whether franchisor liability is justified rather than trying to find a deep pocket from which to compensate a loss that would otherwise not be, or would be inadequate recompense based merely on a label.

Franchisor That Sleeps on Its Rights May Not Be Able to Enforce Them

Maaco, the franchisor of automobile paint and body shops, sought a preliminary injunction against a former franchisee that did not comply with all of its post-termination duties. In Maaco Franchising, LLC v. Ghirimoldi, et al, Bus. Franchise Guide (CCH) ' 15,571 (USDC W.D. North Carolina, July 28, 2015), the court denied Maaco's motion for a preliminary injunction based on a delay of over two years between the Franchise Agreement's termination and the filing of the action of which the motion was a part.

The franchisee became unhappy with the franchisor shortly after the Franchise Agreement was signed. A notice of default was sent to the franchisee in November 2012, after the franchisee stopped paying royalties and other sums. The defaults were not cured and in December 2012, a notice of termination was sent ending the franchise relationship.

As is typical, the Franchise Agreement specified several duties that the franchisee was required to perform after the agreement was terminated, including ceasing to use all names, marks and signs, returning all manuals, and ending the franchisee's right to use all telephone numbers and listings. A covenant not to compete prohibited the franchisee from continuing in the same business after the Franchise Agreement ended. After receiving the notice of termination, the franchisee continued in the same business and continued to use the same telephone number. It removed or obscured the name “Maaco” from its signs, but used a sign identifying its shop as “America Body Shop.” Maaco claimed rights in the name “America's Body Shop” which is used as part of the franchised shop's identification ' the franchisee merely removed the “s.” The franchisee “put away” Maaco's manuals but did not return them.

Maaco took no action to enforce its rights, nor even to communicate with the former franchisee, until the filing of the instant lawsuit over two years after the Franchise Agreement was terminated. To grant the extraordinary remedy of a preliminary injunction, the moving party must show, among other things, that it is likely to suffer irreparable harm in the absence of the requested relief. Maaco did not present evidence that that it lost customers as a result of the alleged trademark infringement or suffered a loss of goodwill during the long delay in seeking to enforce its rights. The court pointed out that if these results did not occur in the over two years it took to bring this action, it is not credible that they are now imminent or likely. Maaco also did not show that it tried to establish another facility in the concerned area during that period or was dissuaded from doing so by the continued operation of the defendant's shop in violation of the noncompetition covenant.

Important to the trademark infringement claim was that the name “America's Body Shop” was denied registration on the Principal Register of the United States Patent and Trademark Office, since it was found to be descriptive, a conclusion that prevents protection of a mark. Such a mark can be registered on the Supplemental Register and will be registered on the Principal Register if it can be shown at a later time that it has come to have a “secondary meaning” ' identification in the mind of the public as the source of a product or service, a standard that had not yet been met by Maaco. The latter also alleged that the shop's telephone number deserved trademark protection, a claim the court rejected.

The court refused to enjoin the continued operation of the defendant's shop since, under North Carolina law, an injunction to enforce a covenant against competition will not be issued if the moving party itself breached the contract in a substantial and material manner that “goes to the heart of the agreement.” Whether Maaco's alleged breaches met that standard is up to a jury, said the court, and therefore Maaco has not shown it is likely to succeed on the merits of the case, a prerequisite for the granting of an injunction. Similarly, Maaco's delay in bringing the action weighs against it in a balancing of the hardships since the hardship that would be suffered by the defendant is much greater two and a half years after the franchise termination than it would have been if the matter had been filed promptly.

Maaco did not explain why it did not take action sooner, but it clearly is paying the price for not doing so.

Darryl A. Hart is an attorney with Bartko, Zankel, Bunzel & Miller in San Francisco.