Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-02584/USCOURTS-cand-3_06-cv-02584-7/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Other Contract

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1The following facts are derived from plaintiffs’ First Amended Complaint (“FAC”) and

accepted as true for purposes of this Rule 12(b)(6) motion.

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

GABANA GULF DISTRIBUTION, LTD., et

al.,

Plaintiffs,

 v.

GAP INTERNATIONAL SALES, INC., et

al.

Defendants.

 /

No. C 06-02584 CRB

MEMORANDUM AND ORDER RE

MOTION TO DISMISS

This action arises out of a distribution agreement gone awry and implicates a number

of state law claims for relief. Now pending before the Court is defendants’ motion to dismiss

all claims for failure to state a claim upon which relief can be granted pursuant to Rule

12(b)(6). After carefully considering the parties’s memoranda, including supplemental

briefing, and having had the benefit of oral argument, defendants’ motion is hereby

DENIED.

BACKGROUND

I. Allegations of the Complaint1

Plaintiffs Gabana Gulf Distribution and Gabana Distribution (collectively “Gabana”)

are United Kingdom companies with worldwide principal places of business in Geneva,

Switzerland. FAC ¶¶ 1-2. Defendants Gap International Sales, The Gap, Banana Republic,

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It is not clear from the FAC if Gap had approved retailers in these countries by this time

or at a later date. 

2

and Old Navy (collectively “Gap”) are Delaware companies with worldwide principal places

of business in San Francisco, California. FAC ¶¶ 3-6. 

In 2003, Gap represented to Gabana that, if it could quickly find a buyer for some

slow-moving excess inventory, Gap would be willing to augment their business relationship.

Gabana agreed to purchase the remaining excess inventory in exchange for Gap awarding

Gabana a formal agreement for Gabana to distribute Gap first-line products in Arabicspeaking countries. FAC ¶ 14. On May 13, 2003, Gabana and Gap signed two agreements:

the Excess Inventory Agreement providing Gabana the right to sell the excess inventory, and

the Distributor Agreement providing Gabana with distribution rights for first-line apparel

products. FAC ¶¶ 15-17. In all, Gabana paid Gap $6 million for 1.7 million pieces of excess

inventory, an amount in excess of its market value. FAC ¶ 18. 

The Distributor Agreement required Gap’s approval of any retailers Gabana may

engage to sell Gap first-line products. FAC ¶ 20. Gabana began developing retailers in the

Middle East and investing in this business plan. FAC ¶¶ 20-26. Gap initially approved

retailers in Qatar and UAE, with sales made in Qatar in 2003 and 2004 and in UAE in the

spring of 2004. FAC ¶ 20. In July 2003, Gap authorized Gabana to place orders for first-line

products for retailers in Bahrain, Qatar, Kuwait, Dubai and Saudi Arabia.2 FAC ¶ 22. Then,

“almost immediately” after the initial Qatar and UAE locations were established, but at a

date not specified in the FAC, Gap began to stall and delay approvals. FAC ¶ 23. At some

unspecified date during the first contract period, Gap asked Gabana to develop and screen

retailers in countries outside of the Distributor Agreement, but Gap also declined to approve

these proposals. FAC ¶ 26. In addition, Gap approved at least one retailer in Switzerland

under one of the contracts at an unspecified time. FAC ¶ 36.

On September 1, 2004, Gap and Gabana renewed the Distributor Agreement with

identical terms and an expiration date of August 31, 2007. FAC ¶ 27. Gap represented to

Gabana that the renewed contract was an “additional step toward cementing a long-term and

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mutually beneficial relationship.” Id. That same month, Gabana submitted proposals for

retailers in Saudi Arabia, Lebanon and Jordan, but again Gap did not approve the proposals. 

FAC ¶¶ 28-29. At some unspecified time, Gabana expressed concern to Gap over the delays,

and Gap encouraged Gabana to invite a retailer to San Francisco to place an order under the

New Distributor Agreement; however, Gap subsequently refused to fill this order. FAC ¶ 30.

Four months after the renewal of the contract, Gap informed Gabana that relations

with distributors including Gabana would be transferred to a different division with a new

executive and that Gap was revising its international strategy. FAC ¶¶ 31-32. Gabana

arranged for the new executive to visit retailers it worked with in the Middle East. FAC ¶ 31. 

From February through May 2005, the executive attempted unsuccessfully to declare Gabana

in breach of the New Distributor Agreement “many times” by claiming incorrectly that

Gabana sold inventory to an unauthorized retailer and transferred distribution rights to a

retailer. FAC ¶ 33. 

On May 12, 2005, just seven months into the three-year contract and one day after

Gabana placed an order for merchandise at Gap’s urging, Gap informed Gabana of its

intention to terminate the New Distributor Agreement effective August 10, 2005. FAC ¶ 34. 

On July 28, 2005, Gap notified Gabana that it must complete all sales of Gap merchandise

within 180 days, or by February 6, 2006, pursuant to the renewed Distributor Agreement. 

FAC ¶ 34. Around June or July 2005, Gap executives met with several Gabana retailers in

the Middle East without the presence of Gabana. FAC ¶ 35. Around this time, though on

dates unknown, at least two retailers placed orders in excess of $1.4 million for Gap first-line

merchandise directly with Gap and not through Gabana. Id.

In reliance on the New Distributor Agreement, Gabana entered into agreements with

retailers Gap approved to distribute Gap first-line merchandise. FAC ¶ 36. After Gap

terminated the New Distributor Agreement, Gabana could not fulfill its contractual

obligations with these retailers. Id.

//

//

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II. Agreements

The three agreements between Gap and Gabana–the Excise Inventory Agreement, the

Distributor Agreement, and the identical New Distributor Agreement (“NDA”)–are properly

attached to the FAC and may be considered by the Court in deciding this motion. Both

Distributor Agreements contain the following relevant sections:

¶ 1(d) Prior to offering any Authorized Goods for sale to any third party, Distributor

shall apply for and obtain [Gap’s] written approval of each of its customers and each

retail store location where Authorized Goods will be sold by each customer. [...] 

[Gap] shall have the right, in its sole discretion, to approve, disapprove, or cancel at

any time any Distributor customer and any retail store where any of Distributor’s

customers propose to sell or have sold Authorized Goods. [...]

¶ 9(d) This Agreement may be terminated by any party without cause for any reason

upon ninety (90) days’ prior written notice to the other party to this Agreement. [Gap]

may terminate this Agreement immediately upon written notice in the event

Distributor’s behavior causes actual and/or potential damage to [Gap’s] reputation. 

¶ 11(a) Choice of Law and Venue. This Agreement will be governed by and

construed in accordance with the laws of the United States and the State of California

as applied to agreements entered into and to be performed entirely within California

between California residents. [...]

¶ 11(g) Relationship of the Parties. Distributor is an independent contractor. There is

no relationship of agency, partnership, joint venture, employment, or franchise

between [Gap] and Distributor. [...]

III. Procedural History

In April 2006, Gabana filed this lawsuit in federal court pursuant to the Court’s

diversity jurisdiction. The FAC states seven claims for relief: 1) breach of contract, 2)

breach of implied covenant of good faith and fair dealing, 3) interference with prospective

economic advantage, 4) fraud, 5) unlawful and unfair business acts or practices, 6) quasicontract/quantum meruit, 7) declaratory relief. 

Defendants bring this motion to dismiss the first five claims for relief for failure to

state a claim upon which relief can be granted. Defendants further allege plaintiffs fail to

plead fraud with the particularity required by Rule 9(b). Defendants also move to dismiss the

quasi-contract claim on the ground it is insufficiently pled. Finally, defendants move to

dismiss the declaratory relief claims on the ground that they are duplicative of other claims. 

//

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DISCUSSION

I. Legal Standards

A. Rule 12(b)(6)

The motion to dismiss for failure to state a claim is viewed with disfavor. Gilligan v.

Jamco Dev. Corp., 108 F.3d 246, 249 (9th Cir. 1997). All factual allegations set forth in the

complaint are taken as true and construed in the light most favorable to the plaintiff. Lee v.

City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001) (internal quotations omitted). A

complaint should not be dismissed on these grounds unless it appears beyond a reasonable

doubt that the plaintiff can prove no set of facts in support of his claim which would entitle

him to relief. Parks Sch. of Business, Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). 

A court may consider certain materials, including documents attached to the

complaint, without converting the motion to dismiss into a motion for summary judgment. 

United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). Documents attached to the

pleadings are “properly a part of the court’s review as to whether plaintiff can prove any set

of facts in support of its claim” on a motion to dismiss for failure to state a claim. Amfac

Mortgage. Corp. v. Arizona Mall of Tempe, Inc., 583 F.2d 426, 429-30 (9th Cir. 1978).

B. California Franchise Relations Act

The California Franchise Relations Act (“CFRA”), Cal. Bus. & Prof. Code §§ 20001

et seq., provides in relevant part:

§ 20001. Franchise

As used in this chapter, “franchise” means a contract or agreement, either expressed or

implied, whether oral or written, between two or more persons by which:

(a) A franchisee is granted the right to engage in the business of offering, selling or

distributing goods or services under a marketing plan or system prescribed in

substantial part by a franchisor; and

(b) The operation of the franchisee's business pursuant to that plan or system is

substantially associated with the franchisor's trademark, service mark, trade name,

logotype, advertising, or other commercial symbol designating the franchisor or its

affiliate; and

(c) The franchisee is required to pay, directly or indirectly, a franchise fee.

(d) “Franchise” does not include any of the following: [...]

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§ 20010. Waiver

Any condition, stipulation or provision purporting to bind any person to waive 

compliance with any provision of this law is contrary to public policy and void.

§ 20015. Domicile or operation in state

The provisions of this chapter apply to any franchise where either the franchisee is

domiciled in this state or the franchised business is or has been operated in this state.

§ 20020. Grounds for termination prior to expiration of term; good cause

Except as otherwise provided by this chapter, no franchisor may terminate a franchise

prior to the expiration of its term, except for good cause. Good cause shall include, but

not be limited to, the failure of the franchisee to comply with any lawful requirement

of the franchise agreement after being given notice thereof and a reasonable

opportunity, which in no event need be more than 30 days, to cure the failure.

II. The Breach of Contract Claim Under the California Franchise Relations Act

Plaintiffs first of three theories under their breach of contract claim contends that ¶

9(d) of the NDA violates the California Franchise Relations Act, which prohibits a franchisee

to be terminated without cause and voids any stipulation to the contrary. See Cal. Bus. &

Prof. Code §§ 20010, 20020. Defendants argue that plaintiffs do not satisfy the jurisdictional

requirements of the CFRA, which restricts its application to “any franchise where either the

franchisee is domiciled in this state or the franchised business is or has been operated in this

state.” See Cal. Bus. & Prof. Code § 20015. As plaintiffs are not domiciled in California and

there is no allegation that the franchised business operated in California, defendants argue

that the CFRA does not apply here and the alleged termination without cause was therefore

properly executed pursuant to the terms of the contract. Furthermore, defendants contend

that even if the CFRA does apply, the NDA explicitly provides that it does not create a

franchise agreement and therefore is not circumscribed by the provisions of the CFRA.

A. Does the CFRA Apply?

There is no dispute that California substantive law applies to this dispute. See NDA ¶

11(a). Yet in applying California law, the Court must determine whether specific statutory

requirements of the CFRA permit its application, as well. 

In interpreting the application of the CFRA to out-of-state franchises, courts have

consistently held that a simple choice of law clause is not sufficient to warrant such

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application. See Premier Wine & Spirits of South Dakota, Inc. v. E. & J. Gallo Winery, 644

F. Supp. 1431, 1436, 1439 (E.D. Cal. 1986), aff’d 846 F.2d 537 (9th Cir. 1988) (holding that

the CFRA does not apply to a plaintiff distributor that is not domiciled in California and has

never operated in California pursuant to a California choice of law provision); Gilchrist

Mach. Co. v. Kotamatsu Am. Corp., 601 F. Supp. 1192, 1201 (S.D. Miss. 1984) (same); 

Bunch v. Artec Intern Corp., 559 F. Supp. 961, 968 n.14 (D.C.N.Y 1983) (same). See also

Gravquick A/S v. Trimble Navigation Intern. Ltd.,323 F.3d 1219, 1223 (9th Cir. 2003)

(finding that a choice of law provision in which the parties stipulate that the law of one state

should apply is not sufficient to overcome geographical limitations on its application).

. There is no dispute that Gabana is not a resident or domiciliary of California and that

it has never operated its business in California. Like the cases cited above, if the parties

merely agreed that California law would apply, without more, then the CFRA would not

apply to this Agreement. Yet there is an additional element to the choice-of-law provision

here that requires the Court to decide an apparent matter of first impression. The choice of

law provision in the Agreement does not merely choose California law to govern; rather, it

chooses California law “as applied to agreements entered into and to be performed entirely

within California between California residents.” NDA, ¶ 11(a). In other words, if the plain

language of the contract is given effect, it stipulates that Gabana shall be treated as a

California resident and that the contract shall effectively be deemed to have been entered into

within California. As a California resident under the NDA, Gabana then satisfies the plain

language of the jurisdiction limitation of the CFRA. 

Defendant has pointed to no authority, nor can the Court find one, that would prevent

the parties from stipulating that Gabana should be treated as a California resident. There is

no further limitation on the stipulation–such as for purposes of personal jurisdiction or

service of process–that would counsel the Court against enforcing it under the CFRA. Under

California law, there is a “strong policy favoring enforcement” of arms-length contractual

choice-of-law provisions, unless the law is contrary to a fundamental policy of California. 

Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459, 464-465, 466 (1992) (noting that

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3Because the plain language of section 20015 is clear, the Court need not consider the

legislative history of the CFRA. See Kavanaugh v. West Sonoma County Union High Sch. Dist., 29

Cal. 4th 911, 919 (2003). The parties’ requests for judicial notice of excerpts of the legislative

history are therefore denied.

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California courts have adopted the principles set forth in section 187 of the Restatement

Second of Conflict of Laws). Without an express limitation on the application of the plain

language of the choice-of-law provision of the NDA, Gabana should be treated as a

California resident.

Furthermore, there is no fundamental policy with which such an interpretation of the

choice-of-law clause would conflict. The motivating purpose behind the CFRA was to

protect franchisees, not franchisors, from contracts of adhesion and abrupt terminations

without cause. See JRS Prods., Inc. v. Matsushita Elec. Corp. of America, 115 Cal. 4th 168,

174 (2004); see also 62B Am Jur 2d Private Franchise Contracts § 1 (“Many states now have

franchise statutes... enacted in large part to counteract the unequal bargaining power between

the franchisor and franchisee, which would allow a franchisor to leverage its bargaining

strength so as to insert provisions in its private agreements with franchisees that would allow

it to sever the franchise relationship at will.”). Where, as here, the plain reading of the

choice-of-law clause would further protect the out-of-state franchisee in a dispute with a

California franchisor in a court located in California interpreting California law, no

fundamental policy exists to further protect such a franchisor. The Court therefore finds that

the choice-of-law clause shall be enforced as written and Gabana shall be treated as a

California resident under the NDA.

As a California resident, Gabana therefore facially satisfies the threshold jurisdictional

requirements of the CFRA. See Cal. Bus. & Prof. Code § 20015. Yet Gap urges the Court to

decipher an “express geographic limitation” in section 20015 that would prevent the parties

from agreeing to treat Gabana as a California resident for purposes of an analysis under the

provisions of the CFRA. The Court, however, finds no support for this argument in the plain

language of the provision.3 Section 20015 reads: “The provisions of this chapter apply to any

franchise where either the franchisee is domiciled in this state or the franchised business is or

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4Both parties agree that section 20010 of the California Business and Professional Code

does not affect the analysis under section 20015, though for different reasons. Because section

20015 does not create a right or requirement that warrants “compliance,” the Court agrees that

section 20010 is not applicable to this inquiry. 

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has been operated in this state.” First, it is evident that this provision is not intended to

protect in-state franchises only. The provision could have, but does not, expressly state such

a limitation, even by merely adding a word such as “only” or “solely.” Moreover, businesses

which have operated in the state are also included within this provision, even if they are not

California domiciliaries or residents.4 Therefore, any argument to limit the intent of this

provision to California-based franchises is misguided. Without further support for the

argument that the parties cannot stipulate to such a choice-of-law clause, the Court finds no

reason to interpret the choice-of-law provision contrary to its plain meaning. 

The Ninth Circuit has applied this analysis in a similar situation. Schwartz v.

Pillsbury, 969 F.2d 840 (9th Cir. 1992). There, the issue before the court was a provision of

the New York Franchise Sales Act, which applied when a person offers to sell or sells a

franchise in New York. The relevant part of the choice of law provision stated as follows:

It is mutually understood and agreed that this Franchise shall be deemed to have been

made in the State of New York, County of Bronx, and that any and all performance

thereunder, or breach thereof shall be interpreted, governed and construed pursuant to

the laws of the State of New York, and that the parties consent that New York State

shall be a forum where any cause of action arising under this franchise may be

instituted.

Id. (emphasis added by the court). 

 The court noted at the outset that the parties would ordinarily not satisfy the

requirements franchise act provision. However, the court found that the parties

unambiguously “deemed” the agreement to have been made in New York and therefore

satisfied the requirements of the statute. Furthermore, the court noted that the defendant,

who argued against the application of the New York statute, was a New York corporation

and the franchisor. As the party drawing the contract, it would be “disingenuous” to argue

that this provision does not mean “what it plainly says.” Id. Similarly, here, defendant

franchisor is presumed to have greater leverage such that it cannot persuasively argue that it

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did not know to what it was agreeing in the NDA. Because there is no reason, stemming

from either the plain language of the contract and the statute or the public policy

considerations underlying this analysis, that the parties’ stipulation to treating Gabana as a

California resident does not satisfy the conditions of jurisdictional provision of the CFRA,

the Court finds that, without further evidence to the contrary, the CFRA applies to this

dispute.

B. Application of the CFRA

Nevertheless, Gap argues that Gabana does not qualify as a franchise under the CFRA

because the contract expressly states that no franchise relationship is created by the

Agreement. See NDA, ¶ 11(g). It is well-settled, however, that the CFRA does not permit

stipulations that waive the requirements of the statute. See Cal. Bus. & Prof. Code § 20010

(“Any condition, stipulation or provision purporting to bind any person to waive compliance

with any provision of this law is contrary to public policy and void.”); see also Boat & Motor

Mart v. Sea Ray Boats, 825 F.2d 1285, 1288 (9th Cir. 1987) (finding § 20001 controlled the

determination of whether a relationship constituted a franchise); Adees Corp. v. Avis Rent a

Car Sys., 2003 U.S. Dist. LEXIS 26293, *3-4 (C.D. Cal. 2003) (“A franchise need not be

explicitly defined as such [under the FRA]. Rather, what constitutes a franchise is

determined by the Act’s three-part definition [in § 20001].”).

As defined in the CFRA, the statute applies to any contract or agreement, express or

implied, in which the purported franchisee meets three criteria. See Cal. Bus. & Prof. Code §

20001. Plaintiffs allege that the three criteria are met, and defendants do not dispute this at

this time. Accordingly, the Court finds that Gabana satisfies both the jurisdictional and

substantive requirements of the CFRA; therefore, the CFRA applies to this Agreement.

CONCLUSION

For the reasons set forth above, the Court finds the CFRA applies to the NDA. 

Because the First Amended Complaint alleges that the NDA was terminated without cause,

which is prohibited by the CFRA, Gabana has successfully stated a claim upon which relief

can be granted. Accordingly, the motion to dismiss on this ground is DENIED.

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G:\CRBALL\2006\2584\order re mtd_2.wpd 11

The Court further finds that declaratory relief may be necessary to determine

plaintiffs’ existing and ongoing rights if the Agreement was not terminated properly. 

Accordingly, the motion to dismiss on that ground is also DENIED.

Finally, the remaining claims require further factual development before the Court can

make a determination as a matter of law. Notably, the Court finds that the fraud claim was

pled with sufficient particularity to satisfy Rule 9(b). Thus, the motion to dismiss on all other

grounds is also DENIED.

IT IS SO ORDERED.

Dated: August 14, 2006 

 

CHARLES R. BREYER

UNITED STATES DISTRICT JUDGE

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