USA – CALIFORNIA Law and Practice Contributed by: Dawn Newton and Hayley M. Lenahan, Donahue Fitzgerald
generally evaluated under federal and California anti - trust law. Consistent with federal law, non-price vertical restraints, including exclusive dealing and territorial restrictions, are generally analysed under the rule of reason. This analysis considers the restraint’s effect on competition in the relevant geographic and prod - uct markets, including the parties’ market power, the extent to which competitors are foreclosed from mar - ket participation, and any legitimate business justi - fications for the restriction. In the franchise context, such restrictions may have pro-competitive benefits by promoting investment in the franchise system, pro - tecting brand standards and promoting inter-brand competition. 7. Joint Employer Risk and Vicarious Liability 7.1 Joint Employer Laws A franchisor is not generally jointly or vicariously lia - ble for the actions of their franchisees in California as long as the franchisee retains autonomy as a manager and employer. The fact that a franchisee must follow the franchisor’s operating system is not sufficient to establish control. Instead, courts consider the amount of control the franchisor has over the enterprise based on the totality of circumstances, including whether the franchisor has the characteristics of an employer or principal by making day-to-day business decisions or by hiring, directing, supervising, disciplining and discharging employees. There may be narrow exceptions for certain claims when the “ABC test” is applied under Section 2750.3 of the Labor Code. This test was established to deter - mine whether a party is an employee or an independ - ent contractor under California law, but it has been applied to determine whether a franchisee or a fran - chisee’s employees are misclassified employees of the franchisor. Under the ABC test, a franchisor may be considered the “hiring party” of a worker unless the franchisor establishes that: • (A) the worker is free from the control and direction of the franchisor in connection with the perfor -
mance of the work, both under the contract for the performance of the work and in fact; • (B) the worker performs work that is outside the usual course of the franchisor’s business; and • (C) the worker is customarily engaged in an inde - pendently established trade, occupation or busi - ness of the same nature as that involved in the work performed. 7.2 Vicarious Liability No information is available on this topic. 8. Choice of Governing Law 8.1 Possibility of a Franchisor Stipulating Non-Local Law The franchisor is permitted to stipulate the laws of its jurisdiction as the governing law of the franchise agreement, though the protections of the CFIL and CFRA are not waivable and will continue to apply regardless of the law designated in the franchise agreement. 8.2 Local Law Requirements Other than the non-waivable laws that will protect the franchisee, the parties can specify any law they choose. 8.3 Mandatory Content California does not require franchise agreements to contain prescribed wording. Instead, certain rights and obligations arise under the CFRA and CFIL regardless of whether they are stated in the agreement. Fran - chisors therefore commonly use a California-specific addendum to bring the agreement into line with these statutory requirements. For example, the CFRA limits a franchisor’s ability to terminate or refuse to renew a franchise, restricts when a franchisor may withhold consent to a trans - fer, and gives the surviving spouse, heirs or estate of a deceased franchisee a reasonable opportunity to qualify to operate or transfer the business. In some cir - cumstances, termination or non-renewal also requires the franchisor to re-purchase certain inventory, sup - plies, equipment, fixtures and furnishings from the franchisee.
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