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Vazquez v. Jan-Pro Franchising International, Inc.

United States Court of Appeals, Ninth Circuit

May 2, 2019

Gerardo Vazquez, Gloria Roman, and Juan Aguilar, on behalf of themselves and all other similarly situated, Plaintiffs-Appellants,
v.
Jan-Pro Franchising International, Inc., Defendant-Appellee.

          Argued and Submitted December 18, 2018 San Francisco, California

          Appeal from the United States District Court for the Northern District of California, No. 3:16-cv-05961-WHA William Alsup, District Judge, Presiding

          Shannon Liss-Riordan (argued), Lichten & Liss-Riordan P.C., Boston, Massachusetts, for Plaintiffs-Appellants.

          Jeffrey M. Rosin (argued), O'Hagan Meyer PLLC, Boston, Massachusetts, for Defendant-Appellee.

          Catherine K. Ruckelshaus and Najah A. Farley, National Employment Law Project, New York, New York, for Amici Curiae National Employment Law Project, Equal Rights Advocates, Dolores Street Community Services, Legal Aid at Work, and Worksafe, Inc.

          Norman M. Leon, DLA Piper LLP, Chicago, Illinois; Jonathan Solish, Bryan Cave LLP, Santa Monica, California; James F. Speyer, Arnold & Porter Kaye Scholer LLP, Los Angeles, California; for Amicus Curiae The International Franchise Association.

          Before: Ronald M. Gould and Marsha S. Berzon, Circuit Judges, and Frederic Block, District Judge. [*]

         SUMMARY [**]

         California State Law / Employment Law

         The panel vacated the district court's dismissal on summary judgment of a complaint brought by a putative class against a defendant international business that had developed a sophisticated "three-tier" franchising model, seeking a determination whether workers were independent contractors or employees under California wage order laws; and remanded for further proceedings.

         In a decision post-dating the district court's decision, the California Supreme Court in Dynamex Ops. W. Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018), adopted the "ABC test" for determining whether workers are employees under California wage order laws. The test requires the hiring entity to establish three elements to disprove employment status: (A) that the worker is free from the control of the hiring entity in connection with work performance - both under the performance contract and in fact; (B) that the worker performs work outside the hiring entity's usual business; and (C) that the worker is customarily engaged in an independent business of the same nature as the work performed.

         The panel held that Dynamex applied retroactively, that none of the defendant-hiring entity's other efforts to avoid reaching the merits were viable, and that the case must be remanded to the district court to consider the merits in light of Dynamex.

         The panel held that under Massachusetts law, prior related decisions rendered by federal courts located in Massachusetts did not have preclusive effect on this case under the doctrines of either res judicata or law of the case.

         The panel held that Dynamex should be applied retroactively. Specifically, the panel held that California law calls for the retroactive application of Dynamex. The panel also held that applying Dynamex retroactively was consistent with due process. The panel held that Dynamex expanded the definition of "suffer or permit" for California wage order cases.

         The panel offered guidance for the district court on remand. The panel held that the district court should consider all three prongs of the ABC test. The panel also held that the district court need not look to Patterson v. Domino's Pizza, LLC, 333 P.3d 723 (Cal. 2014) (involving a plaintiff employed by a franchisee in a case that was not a wage and hour case), in applying the ABC test because the franchise context does not alter the Dynamex analysis. The panel noted that other courts have considered three-tier franchise structures in applying the ABC test. The panel further noted that the district court should consider a number of formulations in determining whether the defendant was plaintiffs' employer and not merely an indirect licensor of a trademark.

         TABLE OF CONTENTS

         OVERVIEW........................................................................7

         THE ISSUES.......................................................................9

         DEPIANTI............................................................................9

         I. The Factual Background...........................................10

         II. Massachusetts and Georgia Decisions....................13

         A. Answer by the Massachusetts Supreme Judicial Court...............................................................13

         B. Parallel Litigation in Georgia..........................14

         C. Final Order from the District Court of Massachusetts.................................................14

         III. The First Circuit's Decision...................................15

         THE PRESENT CASE......................................................16

         I. Res Judicata and Law of the Case............................17

         II. Retroactivity............................................................21

         A. Dynamex Applies Retroactively Under California Law................................................22

         B. Applying Dynamex Retroactively Is Consistent with Due Process.............................................26

         III. The Merits..............................................................29

         A. The Facts.........................................................29

         1. The Contracts Among the Various Entities.......................................................29

         2. The Practical Realities..............................32

         B. The District Court's Decision.........................33

         C. Dynamex.........................................................35

         D. Application of Dynamex on Remand..............37

         1. There Is No Patterson Gloss to the ABC Test ............................................................ 37

         2. Other Courts Have Considered Three-Tier Franchise Structures in Applying the ABC Test ............................................................ 40

         3. Prong B of the ABC Test May Be the One Most Susceptible to Summary Judgment. . 42

         i. Are Unit Franchisees Necessary to Jan-Pro's Business? .................................... 43

         ii. Do Unit Franchisees Continuously Work in Jan-Pro's Business System? ............ 45

         iii. Does Jan-Pro Hold Itself Out as a

         Cleaning Business? .............................. 46

         CONCLUSION .................................................................. 48

          OPINION

          BLOCK, DISTRICT JUDGE

         In this putative class action we are tasked with having to decide the applicability of a recent decision by the high court of California, Dynamex Ops. W. Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018)-postdating the district court's decision. Dynamex adopted the so-called "ABC test" for determining whether workers are independent contractors or employees under California wage order laws. We hold that the test does apply, vacate the lower court's grant of summary judgment dismissing the complaint, and remand for further proceedings consistent with this opinion.

         OVERVIEW

         This case dates back over a decade. In 2008, a putative class action was filed in the District of Massachusetts by a Massachusetts plaintiff, Giovani Depianti, and two Pennsylvania plaintiffs, against the Defendant-Appellee, Jan-Pro International Franchising, Inc. ("Jan-Pro"), a Georgia corporation. By the end of that year, there was an additional plaintiff from Massachusetts plus seven more from other states, including the three individual Plaintiffs-Appellants ("Plaintiffs") in this case, who are California residents. They all had a common cause to pursue: that Jan-Pro, a major international janitorial cleaning business, had developed a sophisticated "three-tier" franchising model to avoid paying its janitors minimum wages and overtime compensation by misclassifying them as independent contractors.

         Because of the variety of state laws involved, the Massachusetts district court chose Depianti's claim as a test case and, over Jan-Pro's opposition, severed the California plaintiffs' claims and sent them to the Northern District of California, Plaintiffs' place of residence. Depianti's case ultimately made its way to the First Circuit Court of Appeals, which in 2017 affirmed the district court's dismissal of the complaint, but not on the merits. See Depianti v. Jan-Pro Franchising Intl, Inc., 873 F.3d 21 (1st Cir. 2017) ("Depianti-CA1"). The claims of all the other plaintiffs before the Massachusetts district court were also dismissed without reaching the merits. But the California plaintiffs have remained steadfast and, as their litigation enters its second decade, they have now brought their battle to this Court.

         Jan-Pro obviously has a financial interest in not opening the floodgates to nationwide liability for multiple years of back wages and overtime pay. However, the case has broader ramifications. The National Employment Law Project, which asserts that it has "a strong interest in this case because of the impacts of [Jan Pro's] franchising schemes and those of similar janitorial companies on low-wage and immigrant workers and their communities," has submitted an amicus brief (joined by other similarly interested not-for-profit organizations) to bring to the Court's attention "details about the kinds of franchising and labor intermediary structures used by Jan-Pro, and their impacts on workers, competing employers, and on state and federal coffers." And in support of Jan-Pro, the International Franchise Association ("IFA"), "the oldest and largest trade association in the world devoted to representing the interests of franchising," rails against applying the ABC test adopted by the California Supreme Court because it "would sound the death knell for Franchising in California," casting the case as "of profound importance to franchising" not only in California but also for the "national economies."

         THE ISSUES

         Because Dynamex postdated the district court's decision, we issued an order directing the parties to brief its effect on the merits of this case. Plaintiffs devoted most of their supplemental brief to the merits, concluding that "in light of Dynamex, there can be no question that the District Court's order granting summary judgment to Jan-Pro must be reversed," and that we should "remand the case for further proceedings."

         By contrast, Jan-Pro devoted only two pages of its sixteen-page supplemental brief to the merits, citing but one clearly distinguishable case. It argued principally that "the Dynamex decision should not be applied retroactively," and that, in any event, it should prevail under the doctrines of the law of the case and res judicata.

         For the reasons that follow, we conclude that Dynamex does apply retroactively, that none of Jan-Pro's other efforts to avoid reaching the merits are viable, and that the case must be remanded to the district court to consider the merits in light of Dynamex. To explain why neither the law of the case nor res judicata is applicable, we begin with a recitation of Depianti's complex procedural history.

         DEPIANTI

         The First Circuit's Depianti opinion, characterizing "the nearly decade long life-cycle" of the Depianti litigations as a "Whirlwind Procedural Tour," 873 F.3d at 24, aptly traces that tour. It also elucidates the nature of Jan-Pro's franchise business and the structure of the three-tier franchise model it created in its effort to establish janitorial cleaners, such as Depianti and Plaintiffs, as independent contractors.

         I. The Factual Background

         As the First Circuit explained, Jan-Pro "organizes commercial cleaning franchises" throughout the United States. Id. at 23. Under its particular franchise model, Jan-Pro "contracts with what are known as intermediary 'master franchisees' or 'master owners' (regional, third party entities) to whom it sells exclusive rights to the use of the 'Jan-Pro' logo, which is trademarked." Id.[1] "These master owners, in turn, sell business plans to 'unit franchisees.'" Id. Thus, Jan-Pro's business model is two-tiered, "with (1) Jan-Pro acting as franchisor and the master owner ...


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