Executive Summary:
In an unreported decision, Judge Rogers of the United States District Court for the Northern District of California denied a franchisor’s motion for a preliminary injunction against a franchisee who was previously terminated for failing to implement a new marketing program based on the franchisee’s argument that the franchise agreement did not “require” it to take on these additional costs and, even though its defense may have been barred by the applicable statute of limitations.
Citation:
BP Products North America, Inc. v. Petroleum, 2020 WL 19877605 (N.D. Cal. Apr. 27, 2020).
Relevant Background:
Plaintiff BP Products of North America, Inc. (“Franchisor” or “BP”) implemented marketing programs that imposed new costs on its franchisees system wide including new signage, fixtures, and lighting. Grand Petroleum (“Franchisee” or “Petroleum”) did not implement these changes arguing that they were material modifications of the franchise agreement and were improperly implemented. After failing to implement these changes, Franchisor terminated Franchisee.
Franchisor filed suit against Franchisee and sought contemporaneous therewith a preliminary injunction against Franchisee. Franchisee filed a counterclaim against BP. Relevant here, the pending before the Court were Franchisor’s motion for preliminary injunctive relief to prevent Grand from further operations after the termination of the franchise agreement and Franchisor’s motion to dismiss certain counterclaims against it.
Decision:
While the background is vague and its decisions related to Franchisor’s motion to dismiss has little nuance, the court’s analysis regarding its decisions to deny Franchisor’s preliminary injunction is as follows:
- In order to prevail on a motion for preliminary injunction, it is the burden of the moving party to establish a likelihood of success on the merits. Winter v. Natural Resources Defense Counsel, Inc., 555 U.S. 7, 20 (2008).
- The Petroleum Marketing Practices Act (“PMPA”) prohibits termination of a franchise between a petroleum franchisor and a petroleum franchisee unless the franchisor complies with both the notification requirements set forth in 15 U.S.C. § 2804 and the grounds and timing requirements set forth in 15 U.S.C. § 2802(b)(2).
- The California Franchise Relations Act (“CFRA”) requires “good cause” for the termination of a franchise agreement pursuant to California Business and Professions Code section 20020.
- Franchisor does not dispute that did not make a disclosure to Franchisee under the California Franchise Investment Law regarding its marketing program but, instead, argues that the franchise agreement already gave Franchisor “discretion to impose such requirements at the franchisees’ expense, and thus could not be a modification of the agreement.”
- The CFIL requires that Franchisors provide, “A statement as to whether, by the terms of the franchise agreement or by other device or practice, the franchisee or subfranchisor is required to purchase from the franchisor or his or her designee services, supplies, products, fixtures, or other goods relating to the establishment or operation of the franchise business, together with a description thereof” (Cal. Corp. Code section 31101(c)(1)(I)) and that modifications are not binding if not made in compliance with the statute (Dollar Sys. Inc. v. Avcar Leasing Sys. Inc., 673 F.Suppl. 1493 (C.D. Cal. 1989)).
- The Court found dispositive and contrary to Franchisor’s position that its franchise agreement expressly states that “Franchisee is not required by agreement or by other devise or practices to purchase from Franchisor or a designee of Franchisor any services, supplies, products, fixtures or other goods relating to establishment or operation of the franchise business, except for ARCO branded motor vehicle fuels and other ARCO branded petroleum products in accordance with the attached agreements. From time to time, Franchise may offer Franchisee other services, supplies, products, fixtures or other goods relating to the operation of the franchise including, but not limited to, point of sale equipment and advertising material which Franchisee may, but is not required to purchase from Franchisor or a designee of Franchisor.”
- Regarding Franchisor’s claim that Franchisee discovered the factual issues constituting the violation more than a year before, the Court summarily found that “the statute of limitations does not bar a defense of illegality.” Styne v. Stevens, 26 Cal.4th 42, 47 (2001).
Looking Forward:
The law regarding the ability of a petitioner to obtain a preliminary injunction is well-settled but the Court’s resolution of this issue was novel and provides significant guidance to both franchisors and franchisees.
- For franchisors, the ability to ask your franchisees to expend any amount of money to stay in line with the brand has been, is, and will continue to be a hotly contested issue. Here, the modification of only a few words in the franchise agreement would have led to compliance with the CFIL, CFRA, and PMPA and, thus, led to a different result. Simply stated, franchisors should not underestimate the importance of specifically identifying what requirements the franchisor can impose on the franchisee throughout the life of the agreement.
- For franchisees, it is not novel for a franchisee to argue that a franchisor is requiring them to take on a cost that the franchise agreement states they are not required to incur. What was novel, and was done in a single sentence, was the Court’s application of the principle that “the statute of limitations does not bar a defense of illegality.” While this is a permissible defense, it is curious on how this would have played out if this was the Franchisee’s only defense in this matter to a preliminary injunction related to the CFRA.
This article was originally published on the California Franchise Network.
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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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