Source: http://www.mulcahyllp.com/blog/recentcasedemonstratesimportancebehindproperlyeducatingcourtsoncaliforniasfranchiselaws.html
Timestamp: 2019-08-17 23:02:00
Document Index: 83109704

Matched Legal Cases: ['§ 20040', '§ 31005', '§ 20001', '§ 31008', '§ 20004', '§ 31006', '§ 31107']

Franchise Investment Law and Franchise Relations Act
Recent Case Demonstrates Importance Behind Properly Educating Courts On California’s Franchise Laws. Franchise and Distribution Law is one of a handful of legal specialties certified by the California State Bar. Franchising is recognized as a specialty largely in part to the complexities and nuances within state and federal franchise laws – most notably, California’s Franchise Investment Law and Franchise Relations Act.
Following removal, Defendants filed a motion to transfer the case to the Western District of Texas consistent with the AR Agreement’s forum selection clause. Specifically, the forum selection clause states that “the exclusive venue for disputes between [the parties] will be the state or federal district courts located in Austin, Texas, and each party waives any objection it might have to the personal jurisdiction of or venue in such courts.” [1]
Plaintiffs opposed the motion to transfer on several grounds, most notably, on the ground that the out-of-state forum selection clause is void and against California’s “broad” public policy codified in the California Franchise Relations Act (“CFRA”) at Business and Professions Code § 20040.5 (“Section 20040.5”).[2]
Defendants disagreed, arguing that Plaintiffs could not rely upon Section 20040.5 because the statute has limited applicability to “franchise agreements,” and that the AR Agreement “is not a ‘franchise agreement.’”[3]
At the onset of its analysis, the court explained that under Ninth Circuit law, contractual forum selection clauses are “presumptively valid” unless: (1) the clause was the result of fraud, undue influence, or overweening bargaining power, (2) the selected forum is so gravely difficult and inconvenient that Plaintiffs would essentially be denied their day in court, or (3) enforcement of the clause would contravene a strong public policy of the forum in which the suit was brought.[4]
Then, turning its attention to the applicability of out-of-state venue prohibition in Section 20040.5, the court found that the AR Agreement “is not a franchise agreement; it is a contract between a small company and a sophisticated area representative who would oversee the solicitation of 30 franchisees.” [5]
Based on this finding, the court granted Defendants’ motion to transfer holding that “[t]he California Franchise Relations Act is not on point and it is not enough to outweigh California’s stated policy of favoring contractual forum selection clauses.”[6]
1. A franchisee is granted the right to engage in a business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and
3. The franchisee is required to pay, directly or indirectly, a franchise fee. [7]
Moreover, the CFIL and CFRA have expanded the definition of “franchise” to include “subfranchisor” – i.e., “any contract or agreement between a franchisor and a subfranchisor whereby the subfranchisor is granted the right, for consideration given in whole or in part for such right, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor.”[8] Because the AR Agreement is a contract granting the Plaintiffs’ business the right to sell franchises in Northern California, it falls within the definition of “subfranchisor.”
Instead of bringing these definitions to the court’s attention, Plaintiffs couched their argument entirely within the language of Section 20040.5, and Defendants’ papers did little more.[9] These obvious mistakes by counsel led to the court’s erroneous finding that the AR Agreement is not a franchise agreement and, therefore, not protected by Section 20040.5.
For instance, the court pointed out that, “[c]onveniently, Plaintiffs left off the page of the [AR] Agreement containing [the forum selection clause] in the version of the [AR] Agreement they attached to their Complaint.”[10]
The Court also found Plaintiffs to have “inexplicably sued their own company” as part of what appears to be a failed attempt to defeat diversity jurisdiction.[11]
[1] Def.’s Mtn. to Transfer, Ex. A, ¶ 17.1 (October 21, 2014).
[2] Pl.’s Oppo., p. 1:15-19 (November 20, 2014).
[3] Def.’s Reply Brief, pp. 2:8-10, 5:1-3 (November 24, 2014) (emphasis added).
[4] Estep, 2015 U.S. Dist. LEXIS 4475, *3 (citing R.A. Argueta v. Banco Mexicano, S.A., 87 F.3d 320, 325 (9th Cir. 1996), and Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1284 (9th Cir. 2006) (“California favors contractual forum selection clauses so long as they are entered into freely and voluntarily, and enforcement would not be unreasonable.”).
[5] Estep, 2015 U.S. Dist. LEXIS 4475, *3 (emphasis added).
[7] Corp. Code § 31005(a); Bus. Prof. Code § 20001(a).
[8] Corp. Code § 31008-31010; Bus. Prof. Code §§ 20004-20006.
[9] Id., p. 4:16-19 (Defendants cited generally to the definitions of “franchisee” (“a person to whom a franchise is granted”), and “franchisor” (“a person who grants a franchise”) under Cal. Bus. & Prof. Code §§ 31006 and 31007 (erroneously referred to in the brief as § 31107)).
[10] Estep, 2015 U.S. Dist. LEXIS 4475, *2, fn 2.
[11] Id. at *2, fn 1.
California State Bar Franchise Law Committee - Case Report – February 2015