Gerardo Vazquez v. Jan-Pro Franchising Int'l Inc. , 923 F.3d 575 ( 2019 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
GERARDO VAZQUEZ, GLORIA No. 17-16096
ROMAN, and JUAN AGUILAR, on
behalf of themselves and all other D.C. No.
similarly situated, 3:16-cv-05961-
Plaintiffs-Appellants, WHA
v.
OPINION
JAN-PRO FRANCHISING
INTERNATIONAL, INC.,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of California
William Alsup, District Judge, Presiding
Argued and Submitted December 18, 2018
San Francisco, California
Filed May 2, 2019
Before: Ronald M. Gould and Marsha S. Berzon, Circuit
Judges, and Frederic Block, District Judge.*
Opinion by Judge Block
*
The Honorable Frederic Block, United States District Judge for the
Eastern District of New York, sitting by designation.
2 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
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
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 3
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.
4 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
COUNSEL
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.
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 5
TABLE OF CONTENTS
OVERVIEW ........................................................................7
THE ISSUES .......................................................................9
DEPIANTI ............................................................................9
The Factual Background ...........................................10
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
The First Circuit’s Decision ...................................15
THE PRESENT CASE ......................................................16
Res Judicata and Law of the Case ............................17
Retroactivity ............................................................21
A. Dynamex Applies Retroactively Under
California Law. ............................................... 22
B. Applying Dynamex Retroactively Is Consistent
with Due Process............................................. 26
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
6 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
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
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 7
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
8 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
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.”
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 9
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.
10 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
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 acting as
franchisee, in one instance and (2) the master owner acting
as franchisor to the unit franchisee, in the other.” Id. 2
The First Circuit explained how this two-tiered system
works:
Jan-Pro and its master owners are separate
corporate entities and each has its own staff.
Moreover, master owners may sell or transfer
their individual businesses without approval
from Jan-Pro. Jan-Pro also reserves the right
to inspect any premises serviced by either the
master owner or any of the master owner’s
franchisees to ensure the Jan-Pro standards
are being maintained. Still, master owners
have their own entity names and internal
1
As of 2009, which at the time of the decision in 2017 was the year
of the most up-to-date figure in the record, “ninety-one different master
owners existed.” Depianti–CA1, 873 F.3d at 23.
2
Our opinion refers to the intermediate entities as either regional
“master franchisees” or “master franchisors” depending on whether the
focus is on their relationships with Jan-Pro or with the unit franchisees.
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 11
business structures, and are responsible for
their own marketing, accounting, and general
operations.
As for master owners and their unit
franchisees, under the terms of the model
franchise agreement, master owners agree to
provide their franchisees with an initial book
of business, as well as start-up equipment and
cleaning supplies. Moreover, the master
owner furnishes a training program for its
unit franchisees. Once initial set-up and
training is complete, the master owner agrees
to (1) assist in the unit franchisee’s customer
relations (by, for example, providing
substitute employees or contractors to supply
services in the event of an emergency
impacting the unit franchisee); (2) provide
the unit franchisee with invoicing and billing
services; (3) advance the unit franchisee
amounts that have been billed but not yet
collected from customers; and (4) make
available to the unit franchisee any
improvement or changes in services or
business methods that are made available to
other franchisees. Additionally, the
agreement notes that a unit franchisee is at all
times an independent contractor solely in
business for itself. As such, the unit
franchisee may, for example, hire its own
employees and decide what to pay them, as
well as decide whether or not to pursue
certain business opportunities.
Id. at 23–24.
12 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
In June 2003, Depianti signed a franchise agreement
with Bradley Marketing Enterprises, Inc. (“BME”), one of
Jan-Pro’s master franchisees. He was promised $100,000 in
gross annual billings by BME, and paid this master
franchisor $23,400 for his unit franchise. In his lawsuit, he
alleged “that his status as a unit franchisee of BME was a
farce and that he was actually a direct employee of Jan-Pro.”
Id. at 24. 3
A Massachusetts statute presumes an individual
performing a service, such as Depianti, to be an employee
unless:
“(1) the individual is free from control and
direction in connection with the performance
of the service, both under his contract for the
performance of service and in fact; and
“(2) the service is performed outside the
usual course of the business of the employer;
and
“(3) the individual is customarily engaged in
an independently established trade,
occupation, profession or business of the
same nature as that involved in the service
performed.”
Mass. Gen. Laws. Ch. 149, § 148B(a). The burden is on the
employer to overcome that presumption by proving all three
3
“The regional master franchisees were not named as defendants,
apparently because their contracts with the unit franchisees contain
mandatory arbitration clauses.” Depianti v. Jan-Pro Franchising Int’l,
Inc., 39 F.Supp.3d 112, 117 n.1 (D. Mass. 2014).
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 13
prongs. Somers v. Converged Access, Inc., 911 N.E.2d 739,
747 (Mass. 2009). If it fails, the individual in question is an
employee. Id.Both sides moved for summary judgment. But the
district court, uncertain “as to how the multi-leveled
franchise model employed by Jan-Pro would impact
application of the [statutory] three prongs,” Depianti–CA1,
873 F.3d at 25, certified the following question to the
Massachusetts Supreme Judicial Court (“SJC”): “Whether a
defendant may be liable for employee misclassification
under [Massachusetts law] where there was no contract for
service between the plaintiff and defendant.” Id. (alterations
omitted). 4
Massachusetts and Georgia Decisions
A. Answer by the Massachusetts Supreme Judicial
Court
The SJC answered the question in the affirmative but did
not interpret it “as asking for direct application of the
elements of the statute to the particular franchise
arrangement that existed between Jan-Pro, BME, and
Depianti.” Id. at 27. The SJC commented that it took no
position “on the question whether the necessary predicates
for liability can be established here, a matter involving
determinations as to the summary judgment record that are
solely within the purview of the United States District
Court.” Id. (quoting Depianti v. Jan-Pro Franchising Int’l,
4
The district court also certified two other questions to the SJC that
are not here relevant.
14 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
Inc., 990 N.E.2d 1054, 1068, n.16 (Mass. 2013) (“Depianti–
SJC”)).
B. Parallel Litigation in Georgia
At the same time that the Depianti case was being
litigated in the District of Massachusetts, a separate
declaratory judgment action initiated by Jan-Pro against
Depianti was being litigated in the Georgia state courts. That
action ultimately resulted in a final summary judgment—
entered by the Georgia Court of Appeals (“GCA”) one
month after the SJC issued its answer to the district court’s
certified question—that “no employment relationship
between Jan-Pro and Depianti existed under [the
Massachusetts three-prong statute] and that Jan-Pro was,
therefore, not liable to Depianti in tort or contract.”
Depianti–CA1, 873 F.3d at 25. The GCA’s decision became
final when the Georgia Supreme Court denied certiorari. Id.
at 30–31.
The rationale for the GCA’s decision was that “Depianti
was free from the control and direction of Jan-Pro; the
cleaning services he performed were outside the usual course
of Jan-Pro’s business; and Depianti was engaged in an
independently-established business.” Id. at 26 (citing Jan-
Pro Franchising Int’l, Inc. v. Depianti, 310 Ga. App. 265(2011) (“Depianti–Georgia”)).
C. Final Order from the District Court of Massachusetts
Critically, the Georgia litigation became final before the
Massachusetts district court took action on the SJC’s answer
to its certified question. Jan-Pro then asked the district court
to dismiss the Massachusetts action on res judicata grounds.
The court agreed. Depianti v. Jan-Pro Franchising Int’l,
Inc., 39 F. Supp. 3d 112, 125–26 (D. Mass. 2014)
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 15
(“Depianti–D.Mass”). It explained that it was obliged to
accord full faith and credit to the GCA’s decision; therefore,
it was “not necessary for the court to conduct an independent
examination of the merits” of that decision. Id. at 126.
This, therefore, was the district court’s direct holding.
However, in dicta, it nonetheless “considered the merits” and
concluded “that Depianti–Georgia appears to be consistent
with Massachusetts law, in general,” as well as with the
SJC’s answer to the certified question. Id. In that latter
regard, the district court recounted that the high court of
Massachusetts did not address the merits—whether Depianti
was a contractor or employee. See id. at 127–28. After
deciding Depianti’s individual claims on res judicata
grounds, the district court severed the California plaintiffs
from the litigation. See Depianti v. Jan-Pro Franchising
Int’l, Inc., No. 08-cv-10663-MLW, 2016 WL 4771056, at *3
(D. Mass. Sept. 13, 2016).
The First Circuit’s Decision
On appeal, the First Circuit did not address the merits,
either. Instead, it explained why it agreed with the district
court that Georgia’s final judgment was entitled to
preclusive effect, noting that “a state court judgment is
entitled to the same preclusive effect in federal court as it
would be given in the state in which it was rendered.”
Depianti–CA1, 873 F.3d at 29 (alterations and quotation
omitted). Thus, Georgia’s res judicata statute, see Ga. Code
Ann. § 9-12-40, was applicable. “And, in order for the
doctrine to apply in Georgia, ‘three prerequisites [had to] be
satisfied: (1) identity of the parties or their privies;
(2) identity of the cause of action; and (3) previous
adjudication on the merits by a court of competent
jurisdiction.’” Depianti–CA1, 873 F.3d at 29 (quoting
16 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
Brown & Williamson Tobacco Corp. v. Gault, 627 S.E.2d
549, 551 (Ga. 2006)).
Depianti did not take issue with the first two
prerequisites, but questioned whether the Georgia judgment
was final “because the superior court never crafted a
declaratory judgment to close out the case.” Id. at 31. The
First Circuit rejected this argument because “[o]nce the GCA
spoke and the Georgia Supreme Court denied certiorari, the
shape of that declaration was foreordained.” Id. Therefore,
“the GCA’s judgment was final for purposes of res judicata.”
Id. at 29. 5
As for the merits, the First Circuit commented: “While
both parties briefed the issue, we need not venture into the
murky world of whether the GCA correctly applied [the
Massachusetts three-prong] test in concluding Depianti was
not an employee of Jan-Pro. Because res judicata dictates
the outcome here, no more is needed.” Id. at 32 n.11. Thus,
as the court explained, “the res judicata consequences of a
final . . . judgment on the merits [are not] altered by the fact
that the judgment may have been wrong or rested on a legal
principle subsequently overruled in another case.” Id. at 32
(alterations in original) (quoting Federated Dep’t Stores,
Inc. v. Moitie, 452 U.S. 394, 398 (1981)).
THE PRESENT CASE
With this understanding of the Depianti litigations, we
first address the two arguments posited by Jan-Pro to avoid
application of Dynamex: (1) that the Depianti final judgment
5
The court also rejected Depianti’s argument “that the Georgia
courts never had personal jurisdiction over him.” Depianti–CA1,
873 F.3d at 31.
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 17
is entitled to preclusive effect in this litigation under either
the principle of res judicata or the doctrine of law of the case;
and (2) that Dynamex should not be applied retroactively.
For the reasons that follow, we reject both arguments and
hold that in light of Dynamex, vacatur of the district court’s
grant of summary judgment for Jan-Pro and remand is the
provident course. We do, however, offer guidance to the
district court regarding the merits.
Res Judicata and Law of the Case
The term “res judicata” traditionally referred to claim
preclusion while issue preclusion was called “collateral
estoppel.” See 18 Charles Alan Wright et al., Federal
Practice and Procedure § 4402 (3d ed. Nov. 2018 update).
However, modern opinions have used “res judicata” to refer
to both forms of preclusion. See id.; Taylor v. Sturgell,
553 U.S. 880, 892 (2008). Jan-Pro uses the generic term “res
judicata” without specifying which form of preclusion is
applicable.
“The preclusive effect of a federal-court judgment is
determined by federal common law.” Taylor, 553 U.S. at
891. Where the allegedly preclusive decision was a diversity
action, federal common law requires us to apply “the law
that would be applied by state courts in the State in which
the federal diversity court sits.” Semtek Int’l Inc. v.
Lockheed Martin Corp., 531 U.S. 497, 508 (2001); see also
Taco Bell Corp. v. TBWA Chiat/Day Inc., 552 F.3d 1137,
1144 (9th Cir. 2009). Because the allegedly preclusive
decisions were rendered by federal courts located in
Massachusetts, we look to Massachusetts preclusion law.
For an earlier adjudication to have preclusive effect,
whether on a claim preclusion or issue preclusion theory,
Massachusetts requires, among other criteria, that the
18 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
adjudication be a final judgment on the merits, and that the
precluded party was either a party in the first action or in
privity with a party. See Bourque v. Cape Southport Assocs.,
800 N.E.2d 1077, 1080 (Mass. App. Ct. 2004). Because res
judicata is an affirmative defense, the burden is on the party
asserting it to demonstrate that it applies. See Fabrizio v.
U.S. Suzuki Motor Corp., 289 N.E.2d 897, 898 (Mass. 1972);
Carpenter v. Carpenter, 901 N.E.2d 694, 699 (Mass. App.
Ct. 2009).
Jan-Pro asserts that Plaintiffs were in privity with
Depianti because they (1) raise the same factual and legal
issues Depianti did; (2) Depianti’s claims were considered a
“test case” for related misclassification claims; and (3) the
same counsel representing Plaintiffs also represented
Depianti, asserted identical legal theories, and relied on
similar evidence. None of these circumstances suffice to
establish privity under Massachusetts law.
As an initial matter, Depianti–D.Mass cannot have
preclusive effect because that decision was not the final
judgment in the litigation. Depianti–D.Mass was affirmed
by the First Circuit without reaching, even in the alternative,
the merits of the application of the ABC test to Jan-Pro’s
business. See Springfield Pres. Tr., Inc. v. Springfield
Library & Museums Ass’n, Inc., 852 N.E.2d 83, 91 (Mass.
2006) (holding that superior court judgment on the merits
was not preclusive because the appeals court affirmed the
judgment “on other grounds having nothing to do with the
merits”).
Therefore, we need only address the First Circuit’s
decision in Depianti–CA1. Although Plaintiffs were initially
parties in the district court, Depianti–D.Mass addressed only
the claims of a single individual, Depianti. And Plaintiffs
were severed from the Massachusetts case before the First
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 19
Circuit rendered its decision. See Depianti–CA1, 873 F.3d
at 24 n.1. Thus, Plaintiffs were not parties to Depianti–CA1.
And in Massachusetts, “the determination whether a
nonparty is in privity with a party depends on the nature of
the nonparty’s interest, whether that interest was adequately
represented by a party to the prior litigation, and whether
binding the nonparty to the judgment is consistent with due
process and common-law principles of fairness.”
Degiacomo v. City of Quincy, 63 N.E.3d 365, 370–71 (Mass.
2016).
Massachusetts has repeatedly held that “mere alignment
of interests is insufficient to support preclusive effect against
a nonparty.” Cruickshank v. MAPFRE U.S.A., 116 N.E.3d
1233, 1237 (Mass. App. Ct. 2019); see also Bourque,
800 N.E.2d at 1081. Therefore, although Plaintiffs’ interests
and Depianti’s interests may align, that overlap is
insufficient to establish privity for preclusion purposes.
Critically, Jan-Pro has not shown that Plaintiffs were
“adequately represented by a party to the prior litigation.”
Degiacomo, 63 N.E.3d at 370. Massachusetts law, like
federal common law, provides that “[a] party’s
representation of a nonparty is ‘adequate’ for preclusion
purposes only if, at a minimum: (1) the interests of the
nonparty and her representative are aligned . . . ; and
(2) either the party understood herself to be acting in a
representative capacity or the original court took care to
protect the interests of the nonparty.” Id. at 373–74
(emphasis added) (quoting Taylor, 553 U.S. at 900).
Here, the Massachusetts district court treated Depianti’s
claims as a “test case,” but it never certified a class and
therefore never inquired whether Depianti would adequately
protect the interests of the other workers Jan-Pro maintains
Depianti was representing. See Fed. R. Civ. P. 23(a)(4).
20 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
And by the time the First Circuit rendered its decision,
Plaintiffs had already been severed from the case. Depianti
had no legal relationship with Plaintiffs, such as being a
trustee, fiduciary, guardian, or agent, categories of
relationships that courts have traditionally recognized as
establishing privity. See Taylor, 553 U.S. at 894. And the
First Circuit specifically noted: “Depianti is the only
remaining plaintiff whose rights are at issue in this appeal.
Thus, while many of the allegations in the complaint were
lobbed against Jan-Pro by the putative class as a whole, our
focus falls squarely on Depianti.” 873 F.3d at 24 n.1. That
caution was not surprising, as the First Circuit’s decision
rested solely on the res judicata effect of the Georgia
judgment, and Depianti was the only franchisee who was a
party in that litigation.
In short, Depianti could not have understood that he was
representing anyone else, and the First Circuit explicitly
recognized that it had no reason to, and was not, protecting
the interests of non-parties.
Finally, binding Plaintiffs to the Massachusetts litigation
would not accord with “due process and common-law
principles of fairness.” Degiacomo, 63 N.E.3d at 370–71.
Foundational to due process is the principle that each
individual should have his day in court before being subject
to its judgment. The Supreme Court has often reiterated the
general rule, subject to limited exceptions, that “one is not
bound by a judgment in personam in a litigation in which he
is not designated as a party or to which he has not been made
a party by service of process.” Taylor, 553 U.S. at 893(quoting Hansberry v. Lee, 311 U.S. 32, 40 (1940)). Here,
because the District of Massachusetts chose Depianti’s
Massachusetts law claims as a “test case” (rather than
hearing Plaintiffs’ California law claims simultaneously), it
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 21
did not certify a class to ensure that Depianti adequately
represented Plaintiffs’ interests. See Depianti, 2016 WL
4771056, at *5. Instead, it severed Plaintiffs’ claims so that
they could represent their own interests. Binding Plaintiffs
to the final decision in Massachusetts would therefore
foreclose their claims without having provided them an
adequate opportunity to litigate them.
In sum, Plaintiffs were not in privity with Depianti for
res judicata purposes under Massachusetts law.
Jan-Pro also argues that we cannot apply Dynamex due
to the law of the case doctrine. This argument is just a
repackaging of its res judicata argument. Depianti–D.Mass
is not the law of the case, as its dicta that Depianti was not
an employee of Jan-Pro under the ABC test was expressly
not affirmed by the First Circuit. See Depianti–CA1,
873 F.3d at 32 n.11. Therefore, it no longer governs even in
the Depianti case itself. Thus, even assuming that the
ultimate Massachusetts holding would have any impact once
Plaintiffs were severed from that litigation—which we
doubt, see 18B Charles Alan Wright et al., Federal Practice
and Procedure § 4478.4 (2d ed. Sept. 2018 update)
(“Following a § 1404(a) transfer, the receiving court should
treat pre-transfer rulings by the transferring court in much
the same way as one district judge treats the ruling of a
colleague.”)—there is no “law of the case” in the
Massachusetts litigation holding that Jan-Pro is not
Plaintiffs’ employer.
Retroactivity
Jan-Pro’s argument that Dynamex should not be applied
retroactively is based on California law, but because it is
largely framed in terms of reliance and fairness interests, it
22 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
also invokes due process concerns. 6 We first discuss
whether California law calls for the retroactive application
of Dynamex. Concluding that it does, we explain why
applying Dynamex retroactively does not violate Jan-Pro’s
due process rights.
A. Dynamex Applies Retroactively Under California
Law.
As the Supreme Court of California has explained, it “is
basic in our legal tradition” that “judicial decisions are given
retroactive effect.” Newman v. Emerson Radio Corp.,
772 P.2d 1059, 1062 (Cal. 1989). This is true even for
decisions that overrule precedent. See Sierra Club v. San
Joaquin Local Agency Formation Comm’n, 981 P.2d 543,
556 (Cal. 1999). As in the federal system, appellate courts
in California apply intervening state supreme court rules
retroactively when reviewing cases, even if the judgment in
the trial court was entered prior to the ruling from the
California Supreme Court. See, e.g., Penn v. Prestige
Stations, Inc., 83 Cal. App. 4th 336, 339 (2000). The
California Supreme Court has repeatedly quoted then-
Justice Rehnquist in explaining that “[t]he principle that
statutes operate only prospectively, while judicial decisions
operate retrospectively, is familiar to every law student.”
Evangelatos v. Superior Court, 753 P.2d 585, 596 (Cal.
1988) (emphasis omitted) (quoting United States v. Sec.
Indus. Bank, 459 U.S. 70, 79 (1982)).
6
The IFA’s amicus brief in support of Jan-Pro focused on the
retroactive application of Dynamex, supplementing Jan-Pro’s analysis
concerning both California law and due process. In analyzing
retroactivity, we address the IFA’s arguments together with Jan-Pro’s.
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 23
At times, the California Supreme Court has stated that
there is an exception to the rule of retroactivity “when a
judicial decision changes a settled rule on which the parties
below have relied.” Williams & Fickett v. Cty. of Fresno,
395 P.3d 247, 262 (Cal. 2017) (quoting Claxton v. Waters,
96 P.3d 496, 503 (Cal. 2004)). The court has said that
“[p]articular considerations relevant to the retroactivity
determination include the reasonableness of the parties’
reliance on the former rule, the nature of the change as
substantive or procedural, retroactivity’s effect on the
administration of justice, and the purposes to be served by
the new rule.” Id. (quoting Claxton, 96 P.3d at 503).
The parties conceptualize this rule and its exception in
different ways. Jan-Pro and the IFA would have us assess
the exception de novo and hold that it applies. At a
minimum, the IFA argues, the extent of reliance is a factual
question, and so we should remand to allow the district court
to determine how much Jan-Pro relied on pre-Dynamex law
before deciding whether to apply Dynamex retroactively.
Plaintiffs, meanwhile, urge us to hold that the California
courts have already held that Dynamex applies retroactively,
and that we are obliged to follow those courts’ conclusions.
The IFA’s argument is conceptually problematic. It
would make little sense for a court to assess the retroactive
effect of Dynamex by developing a factual record concerning
a party’s reliance on previous law. Such an approach could
lead to the surprising result that Dynamex applies
retroactively to some parties but not to others. We thus
decline the IFA’s invitation to remand for further factual
development on the question of reliance.
Plaintiffs base their argument that Dynamex has already
been determined to apply retroactively on three points. First,
emphasizing the general rule in favor of retroactivity,
24 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
Plaintiffs point out that in Dynamex the Supreme Court of
California denied (albeit without comment) a petition by an
amicus, the California Employment Law Council, to modify
the Dynamex opinion for “Clarification That Independent
Contractor Test is Prospective Only.” Second, Plaintiffs also
point out that lower courts in California are now applying
the ABC test retroactively. Finally, they argue that only the
Supreme Court of California has the power to declare one of
its decisions non-retroactive.
Plaintiffs are correct on at least their first two points. 7
With respect to their first argument, the IFA argues that
“Dynamex is silent on the question of retroactivity,” and
reminds us that “it is well-settled that the California Supreme
Court’s refusal to hear a matter does not constitute a ruling
on the merits.” But actions sometimes speak louder than
words. By denying the petition, even without comment, the
court strongly suggested that the usual retroactive
application, rather than the exception, should apply to its
newly announced rule. To be sure, as the IFA argues, a
denial of a request for clarification is not a holding on the
merits. But in an unusual case such as this, it is a data point
for us to consider in light of California’s general tradition
that judicial pronouncements have retroactive effect.
In support of their second argument (that lower
California courts are now applying Dynamex retroactively),
Plaintiffs cite two cases, Garcia v. Border Transp. Grp.,
LLC, 28 Cal. App. 5th 558 (2018), and Johnson v. VCG-IS,
LLC, No. 30-2015-00802813, 2018 WL 3953771 (Cal.
Super. Ct. July 18, 2018). The IFA acknowledges a third
7
We do not address Plaintiffs’ state law argument that only the
Supreme Court of California has the power to designate its own rulings
as prospective-only, as we find Plaintiffs’ other arguments convincing.
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 25
case, Juarez v. Jani-King of Cal., Inc., No. 4:09-cv-03495,
Dkt. No. 240 (N.D. Cal. Dec. 14, 2018), but argues that all
three have no “precedential or persuasive value on the
retroactivity issue.”
Focusing on Garcia, the IFA points out that the court
applied Dynamex retroactively only because the defendant
never raised retroactivity, as was its burden. See Garcia,
28 Cal. App. 5th at 572 n.12. But the Garcia court did go
on to observe, as we do, “that Dynamex applied the ABC test
to the class certification question before it, and the Supreme
Court denied later requests to modify the opinion to apply
the ABC test only prospectively.” Id. Additionally, the
court said, “to the extent Dynamex merely extended
principles stated in [S. G. Borello & Sons, Inc. v. Dep’t of
Indus. Relations, 769 P.2d 399 (Cal. 1989)] and [Martinez v.
Combs, 231 P.3d 259 (Cal. 2010)], it represented no greater
surprise than tort decisions that routinely apply
retroactively.” Id. (internal quotation marks and citations
omitted). 8 The analysis in Garcia is persuasive. And “[a]n
intermediate state appellate court decision is a datum for
ascertaining state law which is not to be disregarded by a
federal court unless it is convinced by other persuasive data
that the highest court of the state would decide otherwise.”
Kwan v. SanMedica Int’l, 854 F.3d 1088, 1093 (9th Cir.
2017) (internal quotation omitted) (quoting Estrella v.
Brandt, 682 F.2d 814, 817 (9th Cir. 1982)).
8
See also Newman, 772 P.2d at 1064 (“With few exceptions and
even after expressly considering suggestions to the contrary, California
courts have consistently applied tort decisions retroactively even when
those decisions declared new causes of action or expanded the scope of
existing torts in ways defendants could not have anticipated prior to our
decision.”).
26 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
In particular, Dynamex did not fabricate the ABC test
anew, but instead carefully explained how the test remains
“faithful . . . to the fundamental purpose of [California’s]
wage orders.” Dynamex, 416 P.3d at 40. See Waller v. Truck
Ins. Exchange, Inc., 900 P.2d 619 (Cal. 1995) (rejecting
argument against retroactivity because the law in question
was “but a logical extension” of well-established principles).
Given the strong presumption of retroactivity, the
emphasis in Dynamex on its holding as a clarification rather
than as a departure from established law, and the lack of any
indication that California courts are likely to hold that
Dynamex applies only prospectively, we see no basis to do
so either.
As a last resort, Jan-Pro and the IFA offer policy
arguments about fairness, reliance, and stability. These
arguments are more in keeping with a due process theory,
which we address next.
B. Applying Dynamex Retroactively Is Consistent with
Due Process.
Because we are convinced that California law requires
us to apply Dynamex retroactively, we can only avoid doing
so if there is a constitutional reason we may not. By
invoking issues of reliance and fairness, Jan-Pro and the IFA
imply a due process challenge. Although neither Jan-Pro nor
the IFA spells out a complete due process argument, both
allude to it repeatedly. The IFA in particular cites to several
decisions that rest on due process considerations—most
notably Moss v. Superior Court, 950 P.2d 59, 81 (Cal. 1998).
As an initial matter, we note that the present case
involves the retroactive application of civil, rather than
criminal, liability. That alone distinguishes Moss, where the
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 27
Supreme Court of California held that the Fourteenth
Amendment’s due process guarantee bars the retroactive
application of a rule leading to a contempt sanction, which
is a criminal penalty. See Moss, 950 P.2d at 80–81.
As to caselaw involving civil (and purely economic)
liability, the Supreme Court has made clear that legislative
acts “adjusting the burdens and benefits of economic life
come to the Court with a presumption of constitutionality”
and are evaluated under a rational basis test. Usery v. Turner
Elkhorn Mining Co., 428 U.S. 1, 15 (1976); see also
Morseburg v. Balyon, 621 F.2d 972, 979 (9th Cir. 1980)
(applying the Turner Elkhorn presumption to state law).
Specifically, “the burden is on one complaining of a due
process violation to establish that the legislature has acted in
an arbitrary and irrational way.” Id. “This is true even
though the effect of the legislation is to impose a new duty
or liability based on past acts.” Id. at 16. The decision to
impose retroactive liability requires a separate justification,
but the “burden is met simply by showing that the retroactive
application of the legislation is itself justified by a rational
legislative purpose.” Pension Benefit Guar. Corp. v. R.A.
Gray & Co., 467 U.S. 717, 730 (1984).
This case implicates a judicial rule rather than a
legislative enactment. “Even more deference is owed to
judicial common-law developments, which by their nature
must operate retroactively on the parties in the case.”
Gibson v. Am. Cyanamid Co., 760 F.3d 600, 622 (7th Cir.
2014) (emphasis removed) (holding that a new rule
announced by the Wisconsin Supreme Court imposing
retroactive liability is constitutional).
Applying Dynamex retroactively is neither arbitrary nor
irrational. The Dynamex court explained that “wage orders
are the type of remedial legislation that must be liberally
28 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
construed in a manner that services its remedial purpose.”
416 P.3d at 32. Moreover, Dynamex made clear that
California wage orders serve multiple purposes. One is to
compensate workers and ensure they can provide for
themselves and their families. Id. But second, wage orders
accord benefits to entire industries by “ensuring that . . .
responsible companies are not hurt by unfair competition
from competitor businesses that utilize substandard
employment practices.” Id. And finally, wage orders benefit
society at large. Without them, “the public will often be left
to assume responsibility for the ill effects to workers and
their families resulting from substandard wages or unhealthy
and unsafe working conditions.” Id. It is with these
purposes in mind that the California Supreme Court
embraced the ABC test and found it to be “faithful” to the
history of California’s employment classification law “and
to the fundamental purpose of the wage orders.” Id. at 40.
By applying Dynamex retroactively, we ensure that the
California Supreme Court’s concerns are respected. Besides
ensuring that Plaintiffs can provide for themselves and their
families, retroactivity protects the janitorial industry as a
whole, putting Jan-Pro on equal footing with other industry
participants who treated those providing services for them as
employees for purposes of California’s wage order laws
prior to Dynamex. And retroactive application ensures that
California will not be burdened with supporting Plaintiffs
because of the “ill effects” that “result[] from substandard
wages.” Id. at 32. Moreover, liability is placed on the entity
that created the business structure at issue. Cf. Turner
Elkhorn, 428 U.S. at 18 (“[T]he imposition of liability for
the effects of disabilities bred in the past is justified as a
rational measure to spread the costs of the employees’
disability to those who have profited from the fruits of their
labor . . . .”); United States v. Dico, Inc., 266 F.3d 864, 880
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 29
(8th Cir. 2001) (applying the Comprehensive Environmental
Response, Compensation and Liability Act retrospectively
because Congress so intended and “acted purposefully to
allocate the cost of hazardous waste cleanups sites ‘to those
who were responsible for creating the sites.’” (quoting
Franklin Cty. Convention Facilities Auth. v. Am. Premier
Underwriters, Inc., 240 F.3d 534, 552 (6th Cir. 2001))).
The Merits
A. The Facts
Plaintiffs were unit franchisees who purchased their
franchises from two different regional master franchisors.
Plaintiff Vasquez purchased his franchise from master
franchisor New Venture of San Bernardino, LLC for $2,800;
plaintiff Roman bought hers from Connor-Nolan, Inc., also
for $2,800; and plaintiff Aguilar, with a business partner,
also acquired his from Connor-Nolan, Inc., but for $9,000.
See Roman v. Jan-Pro Franchising Int’l, Inc., No. 16-cv-
05961, 2017 WL 2265447, at *1 (N.D. Cal. May 24, 2017).
The First Circuit’s Depianti decision factually explained
the uncontested multi-tiered franchise model and several
aspects of Jan-Pro’s franchise agreements with its master
franchisees. But it was only a “brief synopsis of the factual
background,” Depianti–CA1, 873 F.3d at 23, sufficient for
the limited purpose of resolving the case on res judicata
grounds, not on the merits. What follows is a more
comprehensive set of facts taken from the record in this case.
1. The Contracts Among the Various Entities
Jan-Pro’s franchise agreements provide for several
streams of payments. Two are of particular importance.
First, master franchisors are obligated to pay 10% of the
30 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
franchise fee paid to them by unit franchisees to Jan-Pro.
Second, master franchisors are required to pay Jan-Pro 4%
of the revenues which they collect from unit franchisees’
customers for their cleaning services.
Regional master franchisees purchase franchises for
exclusive operations in a given regional area. Among other
things, they advertise cleaning services under the “Jan-Pro”
name. They do not, however, typically perform any cleaning
services; unit franchisees do the cleaning. Regional master
franchisors submit bids for cleaning services to unit
franchisees who can accept or reject the bid. Unit
franchisees may also solicit for their own accounts.
Although the regional master franchisees operate their
own independent businesses and can set their own terms
with unit franchisees, the regional master franchisees’
agreements with Jan-Pro include many requirements for how
the businesses are to be conducted. For example, regional
master franchisees must use the “Jan-Pro” name, logo, and
trademark; maintain specific amounts of insurance; attend
training sessions hosted by Jan-Pro; provide training for unit
franchisees; and allow Jan-Pro to inspect the regional master
franchisees’ books, records, and premises. Regional master
franchisees must also sell a specified number of unit
franchises.
Furthermore, the franchise agreements between Jan-Pro
and the regional master franchisees give Jan-Pro authority to
enforce any agreement between the regional master
franchisee and its respective unit franchisees. If the
franchise agreement between Jan-Pro and a regional master
franchisee terminates, the agreement allows Jan-Pro to
assume the regional master franchisee’s rights and
obligations to its unit franchisees. Similarly, in the event that
a regional master franchisee defaults on its obligations to
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 31
cleaning customers, the agreement provides that Jan-Pro
may assume all of the regional master franchisee’s rights and
obligations to those customers. Moreover, Jan-Pro requires
that regional master franchisees specify in their contracts
with unit franchisees that Jan-Pro is a third-party beneficiary
of those contracts. Finally, Jan-Pro reserves the right to
unilaterally promulgate binding “policies and procedures”
that pertain both to the businesses of the regional master
franchisees and that of the unit franchisees.
There are inconsistencies between Jan-Pro’s agreements
with its regional master franchisees on one hand, and the
agreements between the regional master franchisors and
their unit franchisees on the other. Although the agreements
between Jan-Pro and its regional master franchisees require
that the regional master franchisees use a specific form when
contracting with unit franchisees, Jan-Pro’s CEO testified
that Jan-Pro only provides its regional master franchisees
with a “template” for agreements with unit franchisees.
Whatever the reason, the unit franchisee agreements do not
always fulfill the requirements enumerated in Jan-Pro’s
agreements with regional master franchisees. For example,
none of Plaintiffs’ unit franchise agreements include a clause
naming Jan-Pro as a third-party beneficiary. They do,
however, contemplate that Jan-Pro may promulgate policies
and procedures and require unit franchisees to comply with
them.
In most ways, however, Plaintiffs’ agreements
substantially follow Jan-Pro’s requirements. For example,
all the agreements describe the unit franchisee as an
independent contractor and disclaim an employment
relationship. All the agreements require Plaintiffs to obtain
the regional master franchisor’s consent before assigning
their franchise, with failure to obtain consent constituting
32 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
grounds for termination. All the agreements also include
non-competition clauses that forbid Plaintiffs from engaging
in either janitorial services or the franchising of janitorial
services outside of their Jan-Pro franchise.
2. The Practical Realities
In their depositions, the parties dispute the on-the-
ground realities. As a practical matter, there may be less
control at all levels than what is contemplated in the
agreements. For example, it appears that at least one
Plaintiff operated and solicited a cleaning business outside
of her Jan-Pro unit franchise in apparent violation of her
franchise agreement’s non-compete clause. And as
mentioned, regional master franchisors do not use Jan-Pro’s
form agreement with unit franchisees, nor do they include
the third-party beneficiary provision. Moreover, despite
Jan-Pro’s reservation of the power to do so, a Jan-Pro Vice
President testified that the company’s officials rarely make
site visits to its regional master franchisees. They also
rarely, if ever, inspect the books and records of their regional
master franchisees.
Additionally, there is considerable daylight between the
parties as to Jan-Pro’s involvement in the setting of prices by
the regional master franchisees. Plaintiffs refer to a
proprietary system called “EZ-Bid,” which was developed
by Jan-Pro and lets regional master franchisees quickly
generate bids. Jan-Pro counters that the regional master
franchisors that contracted with Plaintiffs did not use this
system. Furthermore, Jan-Pro employees testified that the
“EZ-Bid” system simply incorporates publicly available
standards for estimating cleaning costs.
The parties also dispute whether unit franchisees in
general, and Plaintiffs in particular, knew about the franchise
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 33
structure and understood that Jan-Pro and their regional
master franchisors were separate entities. Plaintiffs are not
sophisticated parties, and English is not their first language.
Based on their deposition testimony, and drawing inferences
in favor of Plaintiffs, a fair characterization may be that
Plaintiffs understood themselves to be “Jan-Pro cleaners”
but did not necessarily think they were contracting with a
company called “Jan-Pro Franchising International.”
In terms of advertising, Jan-Pro on its website describes
itself as a cleaning company, and lists its regional master
franchisees as “locations.” In turn, many regional master
franchisees, including the ones that contracted with
Plaintiffs, hold themselves out as “Jan-Pro International” on
their websites.
B. The District Court’s Decision
The district court began its analysis by noting that Jan-
Pro contended that Patterson v. Domino’s Pizza, LLC,
333 P.3d 723 (Cal. 2014), supplied the relevant standard.
See Roman, 2017 WL 2265447, at *2. In that case, the
plaintiff was employed by a franchisee and alleged that she
had been subject to sexual harassment by a supervisor for the
franchisee. Patterson, 333 P.3d at 725. Accordingly, she
sought to hold the franchisor vicariously liable. As the
district court pointed out, Patterson held that “a franchisor
could not be held liable vis-à-vis its franchisee unless it
‘enter[ed] the arena’ of overseeing the day to-day operations
of the franchise,” because “[a]ny other guiding principle
would disrupt the franchise relationship.” Roman, 2017 WL
2265447, at *2 (quoting Patterson, 333 P.3d at 739).
Plaintiffs contended, however, that in this wage and hour
case, Martinez v. Combs, 231 P.3d 259 (Cal. 2010), applies.
That case set forth three alternative definitions of “to
34 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
employ”: “(a) to exercise control over the wages, hours or
working conditions, or (b) to suffer or permit to work, or
(c) to engage, thereby creating a common law employment
relationship.” Roman, 2017 WL 2265447, at *2 (emphasis
in original) (quoting Martinez, 231 P.3d at 278).
The district court recognized that “no binding decision
ha[d] addressed the standard applicable to determining
whether a franchisor is an employer of a franchisee,” and “in
the absence of controlling authority” it applied “the Martinez
standard, with the gloss of Patterson.” Roman, 2017 WL
2265447, at *3. In particular, for Martinez’s first prong, it
merged the “‘exercise’ of control” standard with “the ‘right’
to control” standard from Patterson. Id. With this standard
in mind, the court concluded that the unit franchisees “failed
to raise a genuine dispute of fact about whether Jan-Pro
directly or indirectly exercised control over their activities or
whether it had the right to control their day-to-day
activities.” Id. This holding also doomed Plaintiffs’ claim
under the third prong of Martinez since they “failed to
establish an employment relationship” with Jan-Pro. Id. at
*5.
The district court next considered the “suffer or permit”
second prong in Martinez, which “impose[d] liability based
on the defendant’s ‘knowledge of and failure to prevent the
work from occurring.’” Id. at *6 (quoting Martinez,
231 P.3d at 282). It rejected its application because “Jan-Pro
lacked the authority to stop [the] plaintiff unit franchisees
from working.” Id. 9
9
The district court also rejected Plaintiffs’ claim that Jan-Pro
became their employer “because the regional master franchisees became
ostensible agents of Jan-Pro, and so Jan-Pro must answer for the
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 35
C. Dynamex
Dynamex expanded the definition of “suffer or permit”
for California wage order cases. Surveying California
caselaw wrestling with the pervasive issue of how to discern
whether a plaintiff is an independent contractor or an
employee, see Dynamex, 416 P.3d at 15–25, the California
Supreme Court recognized that the caselaw supplied three
alternative definitions of “employee” status in the context of
wage orders, one of which is when a putative employer
“suffers or permits” a putative employee to work. Before
Dynamex, as Martinez explained, this term was understood
to mean that a putative employer had “knowledge of and
fail[ed] to prevent the work from occurring.” 231 P.3d at
282.
Dynamex clarified the definition of “suffer or permit.”
Under Dynamex, a “hiring entity” (the putative employer)
“suffers or permits” a putative employee to work if it cannot
liabilities, if any, of the regional master franchisees.” Roman, 2017 WL
2265447 at *6. It concluded that “[t]here is simply no evidence that [the
unit franchisees] formed a belief, reasonable or otherwise, that their
respective regional master franchisees acted as agents of any other
principal.” Id. Nor did Plaintiffs “offer any argument suggesting that
our defendant through affirmative action or neglect allowed such a belief
to be formed.” Id. On appeal, citing Ochoa v. McDonald’s Corp., 133 F.
Supp. 3d 1228 (N.D. Cal. 2015), Plaintiffs argue that the district court
applied the wrong standard because all that matters is that they formed a
reasonable belief that their regional master franchisors were acting under
some principal’s authority. But in Ochoa, the workers “submitted
declarations stating that they believed McDonald’s was their employer.”
133 F. Supp. 3d at 1239–40. Here, in contrast, Plaintiffs have supplied
no evidence that they were even aware of Jan-Pro International, Inc., the
ostensible principal they are suing. Thus, we agree with the district
court’s reasoning that Plaintiffs were not Jan-Pro’s employees on an
ostensible agency theory.
36 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
overcome the “ABC test.” 416 P.3d at 35. In particular,
Dynamex embraced the Massachusetts version of the test.
See id. at 34 n.23; Mass. Gen. Laws ch. 149, § 148B(a). As
in Massachusetts, the test requires the hiring entity to
establish three elements to disprove employment status:
(A) that the worker is free from the control and direction of
the hiring entity in connection with the performance of the
work, both under the contract for the performance of the
work and in fact; (B) that the worker performs work that is
outside the usual course of the hiring 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. Dynamex, 416 P.3d
at 35. And, as in Massachusetts, all three elements must be
established to disprove employment status. Id. Thus, by
judicial fiat, California incorporated Massachusetts’s
employment classification statute into its labor laws.
As the California Supreme Court explained, the “suffer
or permit to work standard in California wage orders” is
meant to be “exceptionally broad,” id. at 31, because “wage
orders are the type of remedial legislation that must be
liberally construed in a manner that serves [their] remedial
purposes,” id. at 32.
The district court had no opportunity to consider whether
Plaintiffs are employees of Jan-Pro under the Dynamex
standard, and neither party had the opportunity to
supplement the record with regard to the Dynamex criteria.
Given the fact-intensive nature of the Dynamex inquiry, we
leave it to the district court to consider the question in the
first instance with the benefit of a more developed record.
See Wright v. Riveland, 219 F.3d 905, 918 (9th Cir. 2000)
(remanding to the district court for a “fact-intensive
inquiry”).
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 37
D. Application of Dynamex on Remand
As an aid to the court, we offer the following
observations and guidance. See United States v. Gladding,
775 F.3d 1149, 1153 (9th Cir. 2014) (providing “guidance
on remand” for a novel legal issue); M.S. ex rel. Simchick v.
Fairfax Cty. Sch. Bd., 553 F.3d 315, 326 n.13 (4th Cir. 2009)
(“Our court regularly issues opinions to provide guidance on
remand in the interest of judicial efficiency.” (alteration
omitted) (quoting Goodman v. Praxair, Inc., 494 F.3d 458,
466 n.2 (4th Cir. 2007))). On remand, the court should
consider all three prongs of the ABC test and, in doing so,
may wish to consider authorities from other jurisdictions that
apply the test. See, e.g., Shuster v. BAC Home Loans
Servicing, LP, 211 Cal. App. 4th 505, 507–08 (2012)
(looking to “the weight of authority from other jurisdictions”
for “an issue of first impression in California”).
1. There Is No Patterson Gloss to the ABC Test.
As summarized earlier, the district court employed a
gloss from Patterson in holding that Plaintiffs were not
employees under Martinez’s first definition of employment.
However, Patterson, unlike Dynamex, was not a wage and
hour case; therefore, it has no application to the ABC test
applicable to wage and hour cases.
It is true that the California Supreme Court’s opinion in
Patterson included extensive dicta about the “special
features of the franchise relationship,” which necessarily
include a degree of control over the franchisee by the
franchisor in its legitimate effort to protect its brand. See
Patterson, 333 P.3d at 732–34; accord Depianti–Georgia,
712 S.E.2d at 651 (“We recognize that the franchise model
inherently involves some overlap between the business
38 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
model created by the master franchisor and the ultimate
business run by the unit franchisee.” (footnote omitted)).
But Patterson focused on the liability of a franchisor for
a sexual assault against an employee of the franchisee. In
other words, it was a case about vicarious liability in the tort
context. Dynamex, which did not mention Patterson, is
about wage orders. There is no reason that the tests for
employee status must necessarily be the same in wage order
cases as in vicarious liability tort cases. See Dynamex,
416 P.3d at 19 (“Borello . . . call[ed] for resolution of the
employee or independent contractor question by focusing on
the intended scope and purposes of the particular statutory
provision at issue.”); Linton v. Desoto Cab Co., Inc., 15 Cal.
App. 5th 1208, 1216, 1219 (2017) (“[T]he goal of . . . the
Labor Code’s wage and hour provisions is to protect a class
of workers who otherwise would not enjoy statutory
protections. . . . Outside of tort, rather than rigidly applying
the common law test, we look to the history and fundamental
purposes of the statute at issue.” (alterations, internal
citations, and quotation marks omitted)).
The classic justifications for imposing (or withholding)
vicarious liability based on control (or lack thereof) have
little to do with the rationale for wage orders. The purposes
of imposing vicarious liability in tort cases include
“preventing future injuries, assuring compensation to
victims, and spreading the losses caused by an enterprise
equitably.” Lisa M. v. Henry Mayo Newhall Mem’l Hosp.,
907 P.2d 358, 366 (Cal. 1995). Where a supervising entity
has the right of direct control over subordinates, it is in a
position to foresee, manage, and prevent tortious conduct by
those subordinates. Imposing liability on the entity therefore
improves private enforcement of such conduct.
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 39
Wage orders, on the other hand, have more to do with
creating incentives for economic entities to internalize the
costs of underpaying workers—costs that would otherwise
be borne by society. See, e.g., Kerr’s Catering Serv. v. Dep’t
of Indus. Relations, 369 P.2d 20, 24–25 (Cal. 1962)
(“[L]egislation which is enacted with the object of
promoting the welfare of large classes of workers whose
personal services constitute their means of livelihood must
certainly be regarded as of direct and vital concern to every
community and as calculated to confer direct or indirect
benefits upon the people as a whole . . . .” (quoting People v.
Vandersee, 294 P.2d 77, 79 (Cal. Dist. Ct. App. 1956))). The
ABC test for ascertaining employment status in the wage
context reflects this difference in purpose by eschewing
reliance on control over the performance of the worker as a
necessary condition for an employment relationship. 10
Recognizing this conceptual difference, Dynamex favorably
cited two Massachusetts decisions that applied the ABC test
in the franchise context. See Dynamex, 416 P.3d at 40 (citing
Awuah v. Coverall North America, Inc., 707 F. Supp. 2d 80(D. Mass. 2010), and Coverall N. Am., Inc. v. Comm’r of
Div. of Unemployment Assistance, 857 N.E.2d 1083 (Mass.
2006)).
The general policy arguments that Jan-Pro and the IFA
raise are of limited persuasive value. Their concerns would
apply just as much in Massachusetts, where courts have
routinely applied the codified ABC test to franchises (and
have routinely held against franchisors). Furthermore, in
adopting the ABC test, Dynamex laid out multiple public
10
Of course, under prong A of the ABC test, a showing that a worker
is under the control and direction of the hiring entity in connection with
the performance of the work remains sufficient to establish an
employment relationship. See Dynamex, 416 P.3d at 35.
40 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
policy arguments, many of which equally apply in the
franchise context. See Dynamex, 416 P.3d at 31–36.
Thus, the franchise context does not alter the Dynamex
analysis, and the district court need not look to Patterson in
applying the ABC test.
2. Other Courts Have Considered Three-Tier
Franchise Structures in Applying the ABC Test.
Other courts have specifically examined three-tier
franchise structures before, with at least one concluding that
the franchisor is an employer.
As Depianti–SJC explained, the ABC test applies to a
dispute between a putative employee and a hiring entity even
if they are not parties to the same contract. As long as the
putative employee was providing a service to the hiring
entity even indirectly, the hiring entity can fail the ABC test
and be treated as an employer. See Depianti–SJC,
990 N.E.2d at 1068 (“Jan-Pro’s contractual arrangement
with [a regional master franchisee] . . . would provide a
means for Jan-Pro to escape its obligation, as an employer,
to pay lawful wages under the wage statute.”). Depianti–
SJC explained the court’s reasoning with a hypothetical
(edited for consistency with the parties of this case):
[C]ompany A contracts with company B for
services, and company B enters into
arrangements with third parties to perform
the work it undertook under its contract with
company A. We agree that ordinarily, in such
circumstances, company A would not be
liable for misclassification of the third-party
workers. This is because ordinarily, in such
circumstances, company B would be the
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 41
agent of any misclassification. However,
here [Plaintiffs] allege[] that Jan-Pro, and not
[the regional master franchisor], designed
and implemented the contractual framework
under which [they were] misclassified as an
independent contractor. The lack of a
contract between [Plaintiffs] and Jan-Pro
does not itself preclude liability. Where a
party is the agent of misclassification, it may
be directly liable under [the ABC test], even
where it utilizes a proxy to make
arrangements with its employees.
Id. at 1068 n.17. Thus, as a doctrinal matter, Jan-Pro could
be Plaintiffs’ employer under the ABC test even though it is
not a party to any contract with Plaintiffs.
At least one court in Massachusetts has employed this
reasoning to conclude that a top-level franchisor in a nearly
identical business structure was the employer of bottom-
level franchisees. See Da Costa v. Vanguard Cleaning Sys.,
Inc., No. 15-04743, 2017 WL 4817349, at *5 (Mass. Supp.
Sept. 29, 2017) (concluding that unit franchisees provided a
service to top-level franchisor because franchisor’s revenue
was “directly dependent on commercial cleaning work of the
. . . unit franchisees”). An arbitrator, also in Massachusetts,
reached the same conclusion in a well-reasoned decision
concerning yet another three-tiered janitorial franchising
case. See Riberio v. System4 LLC, AAA No. 01 15 0003
8637 (Aug. 23, 2016), confirmed by 275 F. Supp. 3d 297 (D.
Mass. 2017). 11
11
The full order of the arbitrator was attached to a motion to take
judicial notice by Plaintiffs, which we granted.
42 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
3. Prong B of the ABC Test May Be the One Most
Susceptible to Summary Judgment.
In applying the ABC test on remand, the district court
may choose to allow further development of the record.
Application of Prongs A and C is most likely to trigger the
need for further factual development, because the
considerations relevant to those prongs are the most factually
oriented. But the ABC test is conjunctive, so a finding of
any prong against the hiring entity directs a finding of an
employer-employee relationship. Prong B may be the most
susceptible to summary judgment on the record already
developed. We leave it to the district court, of course, to
determine whether summary judgment is warranted on the
current record or whether more factual development is
appropriate.
More specifically, Prong B requires the hiring entity to
establish that it was not engaged in the same usual course of
business as the putative employee. This factor reflects the
distinction between workers who are truly independent
contractors and those whose work involves the hiring
entity’s usual course of business. See Dynamex, 416 P.3d
at 37 (“[W]hen a retail store hires an outside plumber to
repair a leak in a bathroom on its premises or hires an outside
electrician to install a new electrical line, the services of the
plumber or electrician are not part of the store’s usual course
of business and the store would not reasonably be seen as
having suffered or permitted the plumber or electrician to
provide services to it as an employee.”).
Analytically, courts have framed the Prong B inquiry in
several ways. They have considered whether the work of the
employee is necessary to or merely incidental to that of the
hiring entity, whether the work of the employee is
continuously performed for the hiring entity, and what
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 43
business the hiring entity proclaims to be in. See, e.g.,
Mattatuck Museum–Mattatuck Historical Soc’y v. Adm’r,
Unemployment Comp. Act, 679 A.2d 347, 351 (Conn. 1996);
Carey v. Gatehouse Media Mass. I, Inc., 92 Mass. App. Ct.
801, 804–10 (2018).
All of these formulations should be considered in
determining whether Jan-Pro was Plaintiffs’ employer and
not merely an indirect licensor of a trademark. We note that
the Georgia Court of Appeals did not consider any of these
relevant precedents when construing the Massachusetts
independent contractor statute in Depianti–Georgia.
i. Are Unit Franchisees Necessary to Jan-Pro’s
Business?
A common test for comparing the businesses of a hiring
entity and a putative employee is to see whether the putative
employees were “necessary” or “incidental” to the hiring
entity’s business. In some cases, this inquiry can be
conducted through a common-sense observation of the
nature of the businesses. For example, in Carpetland U.S.A.,
Inc. v. Ill. Dep’t of Emp’t Sec., 776 N.E.2d 166 (Ill. 2002),
the Supreme Court of Illinois reasoned that “floor
measurers” are necessary to the business of a carpet retailer
and, thus, were in the same business as the retailer. 12 Id. at
187. In contrast, the putative employee in Great N. Constr.,
Inc. v. Dep’t of Labor, 161 A.3d 1207 (Vt. 2016), performed
“highly specialized restoration work” that was not a “key
component” of the hiring entity, which was a “general
12
The court also analyzed whether the workers conducted their
business “outside of all the places of business of the enterprise for which
such service is performed.” Carpetland, 776 N.E.2d at 169. This
formulation is an alternative version of Prong B embraced by some states
but explicitly rejected by Dynamex. See Dynamex, 416 P.3d at 34 n.23.
44 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
contracting firm doing a mix of residential and commercial
work.” Id. at 1217 (internal quotation omitted). Thus, the
Supreme Court of Vermont held, the putative employee was
an independent contractor.
In other cases, courts view the “necessary” versus
“incidental” distinction in more economic terms. In Sebago
v. Boston Cab Dispatch, Inc., 28 N.E.3d 1139, 1150–51
(Mass. 2015), the court analyzed two cases from Illinois
involving drivers for hire. In the first case, Parks Cab Co. v.
Annunzio, 107 N.E.2d 853 (Ill. 1952), taxi cab operators paid
a flat fee to lease taxicab medallions. In the second case,
O’Hare–Midway Limousine Serv., Inc. v. Baker, 596 N.E.2d
795 (Ill. App. Ct. 1992), chauffeurs leased limousines from
a rental company and paid a percentage of their earnings to
the company. The Sebago court explained that the taxi cab
drivers in Parks Cab were incidental to the operations of the
medallion lessors because the medallion companies’
revenues were not affected by how much the taxi cab drivers
worked. In contrast, the owners of the limousine company
in O’Hare–Midway derived their profits from the earnings
of the limousine chauffeurs. Thus, the work of the
chauffeurs was necessary to the success of the limousine
company. In a similar vein, the Supreme Judicial Court of
Maine held that a company that described itself as a “real
estate and timber management company” was in the same
usual course of business as a timber harvester in part because
it derived a profit from the sale of timber by the harvester.
See McPherson Timberlands, Inc. v. Unemployment Ins.
Comm’n, 714 A.2d 818, 821–22 (Me. 1998).
Both approaches may inform this case. First, Jan-Pro’s
business ultimately depends on someone performing the
cleaning. That work is performed solely by the unit
franchisees. Thus, Jan-Pro fundamentally depends on a
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 45
supply of unit franchisees for its business (and, accordingly,
requires its regional master franchisees to sell a minimum
number of unit franchises). Second, Jan-Pro earns a
percentage of the payments that customers pay for cleaning
services. Thus, unlike the medallion owners in Parks Cab,
Jan-Pro is not indifferent to how much work unit franchisees
do or how well they perform that work. It is not simply
renting out its trademark and goodwill to independent
entities that could use it to perform cleaning services.
Rather, Jan-Pro is actively and continuously profiting from
the performance of those cleaning services as they are being
performed.
ii. Do Unit Franchisees Continuously Work in
Jan-Pro’s Business System?
In analyzing Prong B, some courts have also looked to
whether the services of the putative employee are
continuously used by the hiring entity. This approach also
helps capture the distinction between independent contractor
arrangements designed to evade requirements placed on
employers and traditional contractors like electricians and
plumbers, who perform incidental services for otherwise
unrelated businesses. Cf. Holbrook v. Olympia Hotel Co.,
166 N.W. 875, 878 (Mich. 1918) (“It would seem that
occasionally renovating the rooms of a building, or the
building itself, owned and occupied by the owner as a home,
with paint or paper or both, is not in the usual course of the
trade, business, profession or occupation of the owner,
unless he is himself in the business of painting and
decorating.”). This was the approach taken by the Supreme
Court of Connecticut in Mattatuck Museum. The court held
that a hiring entity cannot meet its burden under Prong B
when it “performs the [putative employee’s] activity on a
regular or continuous basis, without regard to the
46 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
substantiality of the activity in relation to the enterprise’s
other business activities.” Mattatuck Museum, 679 A.2d
at 351. The Supreme Court of Utah has used similar
reasoning in the Prong B context. See Bigfoot’s Inc. v. Bd.
of Review, 710 P.2d 180 (Utah 1985); Black Bull, Inc. v.
Indus. Comm’n, 547 P.2d 1334 (Utah 1976).
The district court should consider, therefore, whether
Jan-Pro’s business model relies on unit franchisees
continuously performing cleaning services.
iii. Does Jan-Pro Hold Itself Out as a Cleaning
Business?
Finally, in determining the usual course of a hiring
entity’s business, courts consider how the business describes
itself. See Athol Daily News v. Bd. of Review, 786 N.E.2d
365, 372 (Mass. 2003). For example, in Gerbder Dental Ctr.
Corp. v. Me. Unemployment Ins. Comm’n, 531 A.2d 1262(Me. 1987), the Supreme Judicial Court of Maine held that
the operator of a dental office was the employer of dentists
who worked there in part because it “publicly advertised the
provision of dental services.” Id. at 1264. Jan-Pro’s websites
and advertisements likewise promote Jan-Pro as being in the
business of cleaning. For example, the website describes
Jan-Pro as an “environmentally responsible commercial
cleaning company” and explains that Jan-Pro provides
“cleaning services.”
Jan-Pro argues that it is in the business of “franchising”
rather than cleaning. Various courts and arbitrators,
however, have been skeptical of such characterizations,
especially in the cleaning franchise industry. This
skepticism was pointedly expressed by a district court in
Massachusetts:
VAZQUEZ V. JAN-PRO FRANCHISING INT’L 47
[F]ranchising is not in itself a business, rather
a company is in business of selling goods or
services and uses the franchise model as a
means of distributing the goods or services to
the final end user without acquiring
significant distribution costs. Describing
franchising as a business in itself, as Coverall
seeks to do, sounds vaguely like a description
of a modified Ponzi scheme—a company that
does not earn money from the sale of goods
and services, but from taking in more money
from unwitting franchisees to make payments
to previous franchisees.
Awuah, 707 F. Supp.2d at 84; see also Da Costa, 2017 WL
4817349, at *6 (Mass. Supp. Sept. 29, 2017) (“Vanguard
cannot reasonably maintain that commercial cleaning is not
part of its ordinary course of business to avoid classifying its
workers as employees while simultaneously touting that it is
‘a leader in the commercial cleaning industry.’”); Riberio,
AAA No. 01 15 0003 8637, at *29 (Aug. 23, 2016).
In Curry v. Equilon Enters., LLC, 23 Cal. App. 5th. 289
(2018), the sole case that Jan-Pro cited in addressing the
substantive aspects of the ABC test, the court held that Shell
is in the business of owning gasoline and real estate, which
is a different course of business than that of gas station
operation. Although Curry’s ABC analysis is somewhat
slim on its own terms, 13 the dichotomy of “gasoline
13
In Curry, the court was not sure that Dynamex applied at all.
Because the court had already conducted a cursory “course of business”
analysis outside of the ABC test context, it included the same analysis
by reference in quickly working through the ABC test “out of an
abundance of caution.” See Curry, 23 Cal. App. at 314–15. Thus, the
48 VAZQUEZ V. JAN-PRO FRANCHISING INT’L
ownership” versus “gas station operation” is significantly
less troublesome than the “the business of franchising” that
Jan-Pro purports to be in. Curry is therefore of limited use
in the ABC test analysis.
CONCLUSION
The judgment of the district court granting summary
judgment for the defendant is vacated and the case is
remanded to the district court for further proceedings
consistent with this opinion.
Each side shall bear its own costs on appeal.
court did not have occasion to apply any of the ABC test-specific
precedents referenced in this opinion.