Executive Summary:
In an unpublished decision, Judge Wilson of the United States District Court for the Central District of California granted a motion to transfer to Florida, rejected a franchisee’s arguments regarding the applicability of California’s forum selection clause rule, and ruled that a development agreement does not qualify as a franchise under the CFRA.
Citation:
Pinnacle Foods of California, LLC v. Popeyes Louisiana Kitchen, Inc., 2021 WL 3557744 (C.D. Cal. Apr. 21, 2021).
Relevant Background:
Popeyes Louisiana Kitchen, Inc. (“Franchisors”) has its principal place of business in Miami, Florida. Prior to 2019, Pinnacle Foods of California, LLC (“Franchisee/Developer”) was a franchisee located in San Diego. In or around 2019, Franchisee entered into a franchise development agreement (“Development Agreement”) where franchisor granted franchisee the exclusive right to develop ten additional locations in around Fresno and Bakersfield over a four-year period. Notably, new franchises opened under the Development Agreement would be governed by their own franchise agreements rather than the terms of the Development Agreement itself.
After entering into the Development Agreement, Franchisor sought to terminate the Development Agreement which Franchisee refused. Franchisor then began submitting site proposals to Franchisee all of which were rejected. Franchisor then held Franchisee in default of the Development Agreement. Franchisee brought suit against Franchisor for breach of contract, violations of the California Franchise Relations Act (“CFRA”), and violations of the Unfair Competition Law (“UCL”). Development Agreement provides that “any action brought by Developer against Franchisor in any court, whether federal or state, shall be brought within such state and in the judicial district in which Franchisor has its principal place of business.” Franchisor seeks to transfer this case to the U.S. District Court for the Southern District of Florida under 28 U.S.C. § 1404(a).
Decision:
The Court issued two rulings in this matter that are highly relevant in potential future actions: (1) California Business and Professions Code section 20040.5 is inapplicable and does not void the forum selection clause in the Development Agreement and (2) the Development Agreement does not qualify as a “Franchise” under the CFRA.
The Court’s relevant findings on the issue of the applicability of 20040.5 were as follows:
- “A valid forum-selection clause should be given controlling weight in all but the most exceptional cases.” Atlantic Marine Constr. Co., Inc. v. United States Dist. Ct., 571 U.S. 49, 63 (quoting Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 31 (1988)).
- A forum-selection clause may be unenforceable in the following circumstances: (1) if the inclusion of the clause in the agreement was the product of fraud or overreaching; (2) if the party wishing to repudiate the clause would effectively be deprived of his day in court if the clause were enforced; and (3) if enforcement would contravene a strong public policy of the forum in which suit is brought. See Peterson v. Boeing Co., 715 F.3d 276, 280 (9th Cir. 2013).
- The enforceability of a forum-selection clause under 28 U.S.C. § 1404(a) is a question of federal law.
- A state law precluding enforcement of a forum-selection clause runs up against a “strong federal policy in favor of enforcing forum-selection clauses so a “plaintiff must point to a statute or judicial decision that clearly states such a strong public policy.” Sun v. Advanced China Healthcare, Inc., 901 F.3d 1081, 1090 (9th Cir. 2018)
- California Business and Professions Code § 20040.5 provides, “A provision in a franchise agreement restricting venue to a forum outside this state is void with respect to any claim arising under or relating to a franchise agreement involving a franchise business operating within this state.”
- While section 20040.5 “expresses a strong public policy of the State of California to protect California franchisees from the expense, inconvenience, and possible prejudice of litigating in a non-California venue,” that public policy is limited to “claims related to the franchise agreement.” Jones v. GNC Franchising, Inc., 211 F.3d 495 (9th Cir. 2000).
- Federal Courts have enforced forum-selection clauses where a plaintiff’s claims do not fall squarely within the language and policy of section 20040.5. Musavi v. Burger King Corp., 2013 WL 5798551, at *3 (C.D. Cal. 2013 (settlement agreement); Frango Grille USA, Inc. v. Pepe’s Franchising Ltd., 2014 WL 7892164, at **2-3 (C.D. Cal. 2014) (rescission of franchise agreement).
- Because this matter concerns a Development Agreement–a “more sophisticated business transaction” (*5)–and not a franchise agreement, it does not fall squarely within the language and policy of section 20040.5 and the forum selection clause is enforceable.
The Court’s relevant findings on whether a Development Agreement qualifies as a Franchise are as follows:
- A contract qualifies as a franchise if it meets the following three requirements under the CFRA: “(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 a 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.” Cal. Bus. & Prof. Code § 20001.
- “The Court has reviewed many decisions applying this three-part definition–including those cited by Plaintiff and others identified through its own research. The Court has not identified a case finding that this franchise definition applies to an agreement to develop future franchises.” *4.
- “As to the first prong, because the Development Agreement contemplates that approved franchises will be governed by future franchise agreements, the Development Agreement does not grant Plaintiff the ‘right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system.” *4.
- “As to the second prong, the Development Agreement expressly states that it ‘does not grant Developer any right to use Franchisor’s Proprietary Marks or the Popeyes System, but merely sets forth the terms and conditions under which Developer will be entitled to obtain a Franchise Agreement.’” *5.
- “… [T]he Court agrees with [Franchisor] that the Development Agreement does not satisfy the first and second prongs of the franchise definition.” *4.
Looking Forward:
This is an incredibly well-written opinion based firmly on logic and well-settled law. There are a few relevant take-aways for people’s consideration:
- Court’s are increasingly applying the rationale of 1404(a), Atlantic Marine, and Stewart when they are choosing to enforce forum selection clauses even where there is a potentially contrary state statute. Similarly, courts are referencing the exceptions to those three cases (i.e., fraud, due process, public policy). Franchisors should be cognizant of these three exceptions and plan accordingly to ensure their forum selection clauses are enforced.
- California Business and Professions code section 20040.5’s applicability is becoming increasingly narrow. While the Department of Financial Protection will continue to require the State Addendum stating that 20040.5 voids a contrary forum selection clause, franchisors should consider continuing to include contrary forum selection clauses and arbitration clauses given these recent rulings.
- The ruling that a Development Agreement does not qualify as a “Franchise” may be interpreted as creating a loophole in the registration requirements in California. For instance, California Corporations code section 31110 states, “… [I]t shall be unlawful for any person to offer or sell any franchise in this state unless the offer of the franchise has been registered under this part or exempted under Chapter 1.” California Corporations code section 31005 defines the term franchise the same as California Business and Professions Code section 20001. Thus, this raises a question of whether a franchisor could sell development agreements in the State of California with the agreement to enter into a future franchise agreement at a later date without being in violation of California’s registration requirements. This question presents many, many others and potential opportunities that franchisors should discuss with their franchise counsel.
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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