Executive Summary:
In a published decision, Judge Domenico of the United States District Court for the District of Colorado ruled against a franchisee’s motion to dismiss where the franchisee challenged the validity of a Colorado forum selection clause.
Citation:
Postnet International Franchise Corporation v. Wu, 521 F.Supp.3d 1087 (D. Col. 2021).
Relevant Background:
PostNet International Franchise Corporation (“Franchisor”) maintains its headquarters in Denver, Colorado. In 2005, James Wu (“Franchisee”) agreed to renew a franchise agreement with Franchisor for a store located in California (“Franchise Agreement”). Through the Franchise Agreement, the parties agreed:
- Franchisor could file suit in the federal district court encompassing the location of Franchisor’s principal place of business at the time of filing suit;
- Franchisee was required to file any lawsuit between the parties in Colorado courts;
- All questions of personal jurisdiction or venue were waived for the purpose of carrying out this forum selection clause;
- Colorado law exclusively governs disputes arising out of the Franchise Agreement; and
- Colorado law shall prevail, without regard to the application of Colorado conflict of law rules.
In spite of these specific agreements, the franchise disclosure document included it the State Addendum that “a provision in a franchise agreement requiring the application of the laws of another state is void .. under the California Franchise Investment Law” and also said that “under California law, a provision in a franchise agreement restricting jurisdiction or venue to a forum outside of California is void.” Contradicting this language, the Franchise Agreement also stated, “The laws of Colorado may not provide the same protections and benefits as local law. You may want to compare these laws.”
Franchisee operated the franchise for its full term until November 2020. The day after the agreement expired, Franchisee opened a new business across the street from his former franchise in violation of the parties agreed-upon post termination covenant not to compete. Franchisor sued Franchisee for violation of the Franchise Agreement in state court. Franchisee removed the case to federal court and seeks dismissal or transfer to a California Court.
Decision:
The Court’s decision concerns both the choice of law / jurisdiction issues and a request for a preliminary injunction to prevent Franchisee from operating in violation of the parties non-compete agreement. The preliminary injunction analysis has no real nuance but the choice of law / jurisdiction question is interesting. The Court’s relevant findings are as follows:
- California Business and Professions Code § 20040.5 voids all forum-selection clauses in franchise agreements that fail to select California as a forum.
- “California disfavors forum-selection clauses, but the Supreme Court of the United States does not.” 1093-94.
- Pursuant to 28 U.S.C. §1404(a), Atl. Marine Const. Co. v. U.S. Dist. Court for the W. Dist. of Texas, 571 U.S. 49 (2013), and Stewart Org. Inc. v. Ricoh Corp., 487 U.S. 22 (1988), federal courts must enforce forum-selection clauses in all but the most extraordinary circumstances.
- Pursuant to M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), forum selection clauses should be enforced unless (1) the clause was unreasonable and unjust, (2) the clause was the product of fraud or overreaching, or (3) the enforcement of the clause would contravene a strong public policy of the forum in which suit is brought.
- As in Stewart, 1404(a) preempts a state law voiding forum-selection clauses where the dispute is heard in federal court and “California law is irrelevant.”
- Moreover, a minimum contacts analysis is irrelevant here because the Franchisee has consent to jurisdiction.
Looking Forward:
The effect of California Business and Professions Code § 20040.5 has long been debated. While some form of the Bremen analysis is the most prevalent manner in which Court’s determine the enforceability of a forum selection clause, this matter provides the most specific road map for how to nullify 20040.5. Specifically, so long as the dispute is being heard in a federal court in the jurisdiction prescribed by the forum selection clause, Section 1404(a) may preempt a competing state law that voids that forum selection clause. For franchisors, this provides several strategic next steps which are better suited for a discussion with their franchise attorneys.
This article was originally published on the California Franchise Network.
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.
This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.
