Executive Summary:
In an unpublished decision, Judge Rodriguez of the United States District Court for the Western District of Texas denied Jack-in-the-Box’s motion to dismiss counterclaims brought against it by a franchisee that had been in default for more than two years, was terminated, and continued to operate the franchise after termination.
Citation:
Jack in the Box Inc. v. San-Tex Restaurants, Inc., 2021 WL 148058 (W.D. Tex Jan. 14, 2021).
Relevant Background:
Plaintiff Jack in the Box, Inc. (“Franchisor”) is a Delaware corporation with its headquarters in California. On August 23, 2010, Franchisor entered into franchise agreements with Defendants (“Franchisees”) for 49 restaurant locations in Texas. Beginning in or around 2017, Franchisees allegedly began to have multiple operational and financial deficiencies. Franchisor sent Franchise pre-default notices outlining the specific deficiencies. When Franchisee allegedly did not address these pre-default notices, Franchisor sent Franchisee a Notice of Default demanding cure by August 1, 2019. After Franchisee failed to timely cure the deficiencies, Franchisor issued a written Notice of Termination. In spite of the Notice of Termination, Franchisee continued to operate its restaurants.
In response to Franchisee’s actions, Franchisor filed suit in the District Court in Texas. Franchisee filed a counterclaim making various allegations. Relevant here, Franchisees contend that they invested millions of dollars into its restaurant and that Franchisor had induced it into this investment with various false representations and that its default was pretextual based on Franchisees support of a vote-of-no-confidence in Franchisor’s CEO. Its Counterclaim alleged claims of relief for violations of the California Franchise Relations Act (“CFRA”), the California Unfair Practices Act (“CUPA”), breach of contract, breach of covenant of good faith and fair dealing, promissory estoppel, negligent and intentional misrepresentation, and civil conspiracy. Franchisor moved to dismiss all claims for relief Franchisees asserted against it.
Decision:
The Court’s analysis weaves in and out of California and Texas law but the most interesting and relevant findings for California franchisors and franchisees concerned the CFRA and CUPA claims.
First, concerning the CFRA claim, the Court found as follows:
- “The CFRA, at section 20000 et seq., serves to protect California franchisees, typically small business owners and entrepreneurs, from abuses by franchisors in connection with the nonrenewal and termination of franchises.” 1-800-Got-Junk? LLC v. Superior Court, 189 Cal.App.4th 500, 515 (2010).
- A party may not avail itself of the protections of the CFRA merely by contractually agreeing to be bound by California law generally because “[C]ourts applying the California statute and regulations in situations where the parties have contractually chosen Californai law have consistently given effect to the residence and place of business limitations of the franchisee protection legislation.” Dr. Pepper Bottling Co. of Tex. v. Del Monte Corp., 1990 wl 291495, AT *4 (N.D. Tex. Jan. 30 1990).
- As such, coverage under the CFRA is limited to those “franchise[s] where either the franchisee is domiciled in this state or the franchised business is or has been operated in this state.” Cal Bus. & Prof. Code § 20015.
- There is no dispute that Franchisees restaurants at issue have not operated in California.
- In spite of one of the original investors being domiciled in California, the Court did not find convincing evidence to demonstrate that investor is currently an owner–in spite of his many company related leadership titles–and should be afforded the protection of the CFRA.
- Based thereon, the Court grants Franchisor’s motion to dismiss the CFRA claim with leave to amend.
Second, concerning the CUPA claim for relief, the Court found as follows:
- The CUPA is a provision of the California Unfair Competition Law that attaches to any conduct occurring in California.
- The California Supreme Court has interpreted this provision to reach non-residents where the allegedly fraudulent conduct occurs in California. Sullivan v. Oracle Corp., 51 Cal.4th 1191, 1208 (2011).
- Franchisees allegations that at least some of the allegedly fraudulent conduct must have occurred in California since Franchisor’s headquarters is located in California was not enough to sustain this claim but “the Court is convinced that this interference, coupled with the choice of law provision in the Franchise Agreement, is enough to afford [Franchisee] the promotions of the CUPA. That is, the choice of law provision implies that the parties contemplated the application of certain California statutory protections that do not contain jurisdictional limitations similar to that in the CFRA.”
- Accordingly, the Court denied Franchisor’s motion to dismiss the CUPA claim.
Looking Forward:
While the underlying briefs may give more context for the manner in which a Texas District Court dealt with two California statutory claims for relief, the Court’s analysis provides a two unfortunate lessons for franchise attorneys and franchisors moving forward:
- As a franchise attorney, it’s difficult to imagine having a franchisee materially in default for more than two years, documenting the default, terminating based on the default, having the franchisee continue to operate after default, and then having your franchisor get sued by the franchisee. This is the type of case where you tell your client repeatedly that they did everything right and yet the franchisor is going to spend hundreds of thousands of dollars defending a frivolous lawsuit and potentially even paying the franchisee to go away. Take solace in that you are not alone and print this case out as yet another example of times when the legal system lets bad lawsuits go forward.
- For franchisors, there is an assumption that California courts liberally interpret the law against you and that other states–particularly conservative states like Texas–are more franchisor friendly. Simply stated, the manner in which this Texas court interpreted these California statutes as well as the rest of the allegations not covered in this article was franchisee friendly. The jurisdiction where a case is heard is important but there is not a jurisdiction in this country that will always find for franchisors or franchisees.
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.
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