Executive Summary:
In an unpublished decision, Judge Nunley of the United States District Court for the Eastern District of California granted the defendant franchisor’s motion to transfer the matter from California for all non-California franchisees who initiated the lawsuit and issued an order to show cause for the sole California franchisee on why its action should be transferred as well.
Citation:
Baird v. OsteoStrong Franchising, LLC, 2022 WL 705883 (E.D. Cal. Mar. 9, 2022).
Relevant Background:
OsteoStrong Franchising, LLC (“Franchisor”) is a company that sells franchises for bone density improvement centers. Franchisor maintains its principal place of business in the Southern District of Texas in Harris County. Plaintiffs are franchisees of Franchisor located throughout the United States (“Franchisees”) but a single franchisee, K&L Wellness, LLC (“California Franchisee”) operates in California. Franchisees make numerous allegations against Franchisor including that Franchisor omitted information from its franchise disclosure document and thereby fraudulently induced Franchisees to enter into their respective Franchise Agreements. Nevertheless, each of the Franchisees’ franchise agreements contains a substantially similar forum selection clause that states the following:
19.4 Venue. With respect to any controversies, disputes or claims which are not finally resolved through mediation as provided in Section 19.2., the parties agree that any action brought by either party against the other in any court, whether federal or state, must be brought and maintained exclusively within the state and federal judicial district courts that service the county in which Franchisor maintains its principal business address at the time the action is initiated, and the parties hereby waive all questions of personal jurisdiction or revenue for the purpose of carrying out this provision.
In spite of this provision, Franchisees filed their action in the United States District Court for the Eastern District of California. In response, Franchisor filed a motion to transfer. This decision follows.
Decision:
Facially, the District Court followed the same rationale followed by numerous other courts in other jurisdictions to grant the transfer of their actions by finding the forum selection clause in the non-California Franchisees’ franchise agreements were valid. Where this matter becomes more complex is the interaction between California Business & Professions Code § 20040.5 and the California franchisee who chose to file suit along with seven other non-California franchisees. The Court’s analysis of this point was as follows:
- California Business & 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.”
- California Business & Professions Code § 20015 provides, “The provisions of this chapter apply to any franchise where either the franchisee is domiciled in this state or the franchised business is or has been operated in this state.”
- “[E]nforcement of the forum selection clause is unreasonable with respect to [the California franchisee] pursuant to § 20040.5. Breman, 407 at 10. Accordingly, the forum selection clauses in the non-California Plaintiffs’ franchise agreements are valid and the forum selection clause in K&L Wellness’s franchise agreement is void.” *4
- After performing the § 1404(a) analysis related to the convenience of the Franchisor and the non-California Franchisees and finding that the non-California Franchisees’ case should be transferred to the Southern District of Texas, the Court stated the following:
“With the transfer of the non-California Plaintiffs to the Southern District of Texas and the already-pending litigation against OsteoStrong there, it remains unclear to the Court why the California Plaintiff’s case should remain in this district. K&L is therefore ordered to show cause why this action should not be transferred to the Southern District of Texas.” *6
Looking Forward:
A state law precluding enforcement of a forum-selection clause runs up against a “strong federal policy in favor of enforcing forum-selection clauses.” Sun v. Advanced China Healthcare, Inc., 901 F.3d 1081, 1090 (9th Cir. 2018). As a result, there have been multiple federal cases in recent years where the court has declined to apply California Business and Professions Code § 20040.5. Here, the District Court applied § 20040.5, voided the California franchisee’s forum selection clause, but used the California franchisee’s choice of tying its case to seven non-California franchisees to order it to show cause why the § 1404(a) analysis should not result in its transfer along with the other non-California franchisees.
If this is confusing, here’s the simple lessons: multiple states have laws precluding the enforcement of a forum-selection clause and multiple state agencies will require in a franchisor’s addendum a sentence disclaiming the franchise agreement’s forum selection clause, but those laws and disclaimers are increasingly becoming more difficult to enforce in federal court. Franchisors should not shy away from identifying their chosen forum–particularly their principal place of business–and then seeking to enforce that forum in federal court.
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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