Let’s Try on the Patterson Gloss Again: The Ninth Circuit Retracts Vazquez

In its May 2019 opinion in Vazquez v. Jan-Pro Franchising Int’l, Inc.,[1] the Ninth Circuit held that the recent California Supreme Court decision, Dynamex Ops. W. Inc. v. Superior Court,[2] should apply retroactively.  On Monday, the Ninth Circuit withdrew its Vazquez opinion and will certify the retroactivity question to the California Supreme Court.  The Ninth Circuit’s withdrawal of Vazquez is a welcomed development for franchisors doing business in California because the Ninth Circuit’s decision in Vazquez not only held Dynamex applied retroactivity, but offered “guidance” on how Dynamex should apply to California franchise relationships.  In doing so, the Ninth Circuit not only ignored its general rule that “courts and agencies are not required to decide issues unnecessary to the results they reach,” but also inexplicably gave no weight to California precedent that, under Miller v. Gammie,[3] it was required to apply.

The Dynamex decision and its impact on the Martinez test

In California, an “employer” under a wage order is typically defined by Martinez v. Combs as someone who exercised control over the wages, hours, or working conditions of another; suffered or permitted another to work; or engaged, and thereby a common law employment relationship is created.[4]  In Dynamex, the California Supreme Court addressed what it meant for an employer to “suffer” or “permit [another] to work”[5] holding that lower courts should apply the “ABC test” to determine if an employment relationship, as opposed to an independent contract relationship, exists.[6]  Under the ABC test, a claimant is presumed to be an employee, and a purported employer may rebut the presumption only if it can establish: (A) that the worker is free from the control and direction of the hiring entity in connection with the performance of work, both under the contract and in fact; (B) that the worker performs work that is outside the usual course of the entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.[7]  If an employer fails to prove any prong, it is deemed an employer for purposes of the wage order. 

The Dynamex ABC test, if applied literally and without regard to the special features of a franchise relationship, could jeopardize many, if not all, California franchise relationships.  For example, franchisors often assert they are in the business of selling franchises, and it is the independently owned franchisees that are in the business of actually operating the franchised business.  But some courts question that distinction, especially when a franchisor not only sells, but also operates outlets that are similar to those operated by its franchisees.  Because the distinction between the franchisor as the developer and seller of a business concept and the network of franchisees as the actual operators is clouded, courts need to use common law tests to determine whether notwithstanding the franchise relationship defined by a franchise agreement, there is still an employment relationship.  That is where Jan-Pro found itself in Vazquez. 

Vazquez and the Patterson gloss

In Vazquez, a Jan-Pro commercial cleaning franchisee brought an action under a California wage order claiming it was actually Jan-Pro’s employee, not a franchisee.  In its motion for summary judgment, Jan-Pro argued that its franchisee was an independent contractor under applicable California law, and cited to Patterson v. Domino’s Pizza, LLC, while Vazquez claimed that he was Jan-Pro’s employee under a strict application of the Martinez test.[8]  In Patterson, the California Supreme Court recognized that a strict application of California’s vicarious liability test would do harm to franchise relationships, and instead applied a modified form of the common law test to account for the fact that a franchise relationship necessarily contemplates some level of control by the franchisor over the franchisee and its operation.[9]  The district court in Vazquez took the same approach that Patterson did, applying a “Patterson gloss” to the Martinez definition of employer.[10]  It did so because the district court recognized that, if it did not apply a Patterson gloss to the Martinez test, it “would yield ‘a distorted view of operative law,’ inasmuch as Patterson ‘denigrate[d] reliance on [the California Supreme Court’s] older decisions’ and applied its new standard where the ‘traditional common law principles of agency’ would otherwise apply.”[11]  Having modified the Martinez test to account for the special features of the franchise relationship, the district court in Vazquez granted Jan-Pro’s motion for summary judgment. 

Then came Dynamex.  In considering the franchisee’s appeal, the Ninth Circuit asked the parties to address the effect of Dynamex on the district court’s decision.[12]  Initially, the Ninth Circuit concluded that Dynamex applied retroactively, and that “the case must be remanded to the district court to consider the merits in light of Dynamex.”[13]  However, instead of leaving that application to the district court in the first instance, the Ninth Circuit offered “guidance” as to how the district court should apply Dynamex.  Significantly, its guidance conflicted with the California Supreme Court’s decision in Patterson because it dismissed the relevance of the franchise relationship.

Miller and the role of precedent

In Miller v. Gammie, the Ninth Circuit issued an en banc decision instructing appellate panels that they remain bound to apply the “mode of analysis” from decisions with precedential value.[14]  The Miller rule binds panels regardless of whether or not the precedential framework is derived from state or federal decisions, so long as the framework is embodied by “a decision of a court of last resort.”[15]  An analytical framework will remain good law until such a court issues a decision “clearly irreconcilable” with the prior precedent.[16]

In Patterson, the California Supreme Court comprehensively considered the many “special features” that exist in a franchise relationship in determining how best to apply the common law test for respondeat superior liability to a franchise relationship.  Since it did not involve a franchise relationship, the Dynamex decision did not undercut the Patterson “mode of analysis,” and most certainly is not “clearly irreconcilable” with Patterson.  Consequently, Patterson, and the special attention the California Supreme Court gave to the franchise relationship, should remain the proper means for analyzing the application of common law tests in the franchise context. 

While the Ninth Circuit order reflects the certified question is on the issue of retroactivity hopefully, the California Supreme Court’s resolution of the certified question will also address the fundamental question of whether Dynamex was intended to overrule Patterson or whether the franchise-conscious framework used in Patterson must be taken into account when applying the Martinez test in the context of a franchise relationship.