Executive Summary
In a slip opinion, Judge Maame Ewusi-Mensah Frimpong of the United States District Court for the Central District of California analyzed a dealer agreement between the plaintiff and defendant and found that the plaintiff failed to establish the existence of a franchisor-franchisee relationship because plaintiff failed to demonstrate the existence of a marketing system or franchise fee. The Court also found that even if the plaintiff could establish a franchisor-franchisee relationship, the plaintiff’s franchise claims were time-barred under the California Franchise Investment Law.
Citation
Absolute USA, Inc. v. Harman Professional, Inc., 2023 WL 2064048 (C.D. Cal. Feb. 14, 2023).
Relevant Background
On or about May 28, 2015, Absolute USA, Inc. (“Absolute”) and Harman Professional, Inc. (“Harman”) entered into a Dealer Agreement (the “Agreement”) authorizing Absolute on a non-exclusive basis to purchase, sell, and market certain Harman-approved and designated products to end users. The Agreement was for a one year term and included an automatic renewal for successive 12 month periods unless either party notified the other at least 30 days prior to the expiration of the then-current Term that they did not wish to renew. The Agreement was renewed for multiple successive one-year terms until March 2020 when Harman orally terminated the Agreement without providing 30 days notice. Absolute thereafter filed suit and asserted multiple claims for relief including violation of the California Franchise Relations Act (“CFRA”) and California Franchise Investment Law (“CFIL”). Harman moved to dismiss those claims because (i) Absolute did not establish the existence of a franchisor-franchisee relationship and (ii) Absolute’s claim that Harman offered and sold a franchise to Absolute is time-barred.
Decision:
In a thorough analysis of the elements of a franchise under the CFIL, the District Court found that Absolute did not sufficiently establish the existence of a franchisor-franchisee relationship and that the franchise related claims would be time-barred under the CFIL. Critical facts and findings are as follows:
- Pursuant to Iqbal, the Court analyzed the assertions in the complaint, the Agreement itself, and the motion to dismiss related pleadings to determine if Absolute had established a franchisor-franchisee relationship.
- The Court found that Absolute failed to establish that Harman “granted the right to engage in a marketing system substantially prescribed by the franchisor” because neither Harman’s conclusory allegations in the pleadings nor the Agreement demonstrated that Harman’s requirements and processes amounted to a prescribed marketing system.
- The Court found that Absolute failed to establish that Absolute was “required to pay a franchise fee” because the identified fees were merely ordinary, incidental business expenses.
- The Court found that Absolute’s franchise claims were time-barred by the CFIL’s four year statute of limitations because the gravamen of those claims was Harman’s alleged failure to register as a franchise in 2015 prior to entering into the Agreement.
Looking Forward
While the Central District Court’s slip opinion did not establish new franchise related precedent, the thoroughness of CFRA analysis serves as an excellent starting point for both businesses who are accused of being franchisors and/or businesses who are determining whether to assert that another business is their franchisor.
As always, our team stands ready to assist your business with all of its franchising needs. If you have questions or need assistance, please contact the authors listed below.
Thomas O’Connell – Tom O’Connell is a Shareholder at Buchalter APC, where he serves as Chair of the firm’s Franchise Law Practice and Chair of Litigation for the firm’s San Diego office.
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