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July 13, 2015: Does New NLRB Advice Memorandum Indicate That The Tide Has Turned For Joint Employer Liability In Franchising?

The Associate General Counsel for the National Labor Relations Board (“NLRB”) recently issued an Advice Memorandum finding that a franchisor was not liable as a “joint employer” for the alleged unfair labor practices of one if its franchisees.

While the memo does not set legal precedent, it does represent a deviation by the NLRB to its recent aggressive treatment of franchisor-franchisee relationships as reflected in the landmarkMcDonald’s, USA, LLC case and in the amicus brief submitted by the NLRB’s General Counsel in the Browning-Ferris Industries of California Inc. case. (Amicus Brief of the General Counsel at p. 14, Browning-Ferris Industries of California d/b/a BFI Newby Island Recyclery, Case 32-RC-109684 (June 26, 2014)(“But notwithstanding the creation of an intermediary, franchisors typically dictate the terms of franchise agreements and ‘can exert significant control over the day-to-day operations of their Franchisees’)).

Applying the NLRB’s current standard of joint employment and the standard of joint employment proposed by the NLRB’s General Counsel in Browning-Ferris Industries, the Associate General Counsel concluded that franchisor Freshii Development, LLC (“Freshii”) was not a joint employer with its Chicago franchisee. This is welcome news for those in the franchise industry.

Below, we discuss the Associate General Counsel’s decision, including the relevant facts and application of those facts to the two different standards of joint employment currently before the NLRB. In conclusion, we identify several “best practices” that franchisors should employ in light of this new Advice Memorandum. 

Relevant Factual Background

Freshii is the franchisor of a fast-casual restaurant chain operating in more than a dozen countries. In the summer of 2014, Nutritionality, Inc. (“Nutritionality”) – a Freshii franchisee in Chicago, Illinois – allegedly terminated two employees for attempting to unionize the workforce. These terminations were brought to the attention of the Chicago Regional Office (“Region 13”) of the NLRB. (The National Labor Relations Board is an independent federal agency – appointed by the President, with Senate consent – that acts as a quasi-judicial body in deciding cases involving the rights of private sector employees.) Region 13 found that Nutritionality’s conduct constituted unfair labor practices regarding terminations and discipline but requested advice from the NLRB’s Office of the General Counsel as to whether Nutritionality is a joint employer with Freshii and/or Freshii’s local development agent. (Region 13 also asked the Office of the General Counsel to provide advice on whether Freshii’s Chicago development agent was a joint employer with Nutritionality. In footnote 3 of the Advice Memorandum, the Associate General Counsel summarily found that because the development agent’s activities fell strictly within its agreement with Freshii, the development agent was not a joint employer with Nutritionality. In light of this finding, the analysis provided in the Advice Memorandum only addressed the joint employment issue with respect to Freshii and Nutritionality.)

On April 28, 2015, the NLRB’s Associate General Counsel issued the Advice Memorandum at issue – finding that Freshii and Nutritionality did not qualify as joint employers under the existing NLRB standard or the stricter standard proposed by the NLRB’s General Counsel inBrowning-Ferris Industries. (It was the Browning-Ferris Industries standard that was later applied in the McDonald’s case.)

The Current Joint Employer Standard

Under the NLRB’s current standard, two separate entities are deemed joint employers of a single workforce if they “share or codetermine those matters governing the essential terms and conditions of employment.” (CNN America, Inc., 361 NLRB No. 47, slip op. at 3 (Sept. 15, 2014).) To reach this status, the putative joint employers must meaningfully affect matters relating to the employment relationship “such as hiring, firing, discipline, supervision, and direction.” (Id. (internal citation omitted).) Other facts may also be considered, including an employer’s involvement in decisions relating to wages and compensation, the number of job vacancies to be filled, work hours, the assignment of work and equipment, employment tenure, and the collective bargaining process. (CNN, 361 NLRB No. 47, slip op. at 3 n.7 & 7.)

Applying the current standard to the facts in this case, the Associate General Counsel found that “the evidence does not establish that Freshii meaningfully affects any matters pertaining to the employment relationship between Nutritionality and its employees.”

Focusing on the duties and obligations imposed upon Freshii by the franchise agreement and operations manual, the Associate General Counsel found that Freshii played “no role” in Nutritionality’s decisions regarding hiring, firing, disciplining or supervising employees.

Although the Freshii operations manual contains “System Standards” – defined as “mandatory and suggested specifications, standards, operating procedures and rules that Freshii periodically prescribes for operating a Freshii Restaurant” – the evidence showed that Freshii did not actively enforce any of its “non-food-related requirements.” (For example, after Freshii updated its logo and tagline, it did not require any franchises to update their materials. Also, while not necessarily sound policy for a franchise system, the development agent admitted that “he has not known Freshii to ever force franchisees to do anything.”)

Further, the franchise agreement specifies that Freshii “neither dictates nor controls labor or employment matters for franchisees and their employees….” Any guidance provided by Freshii on these matters does not have to be followed by the franchisees. For example, the operations manual includes a sample hiring advertisement and sample interview questions to ask potential hires. It also explains how to calculate “labor cost percentage” based on the actual labor used and how to project labor calculations to schedule staff in advance. None of these employee hiring or management tools are mandatory and the franchisee is free to choose alternatives.

Freshii also provides franchisees with a sample employee handbook that contains personnel policies, but again, does not require franchisees to use the handbook and policies. The Associate General Counsel found that although Nutritionality used the handbook provided by Freshii, other franchisees, including the stores owned by the nearby development agent, used a different handbook that contained different employment policies.

The Associate General Counsel also found that Freshii was only nominally involved in employee hiring decisions. For instance, while applicants were able to submit their resumes through Freshii’s website for employment openings in the franchised businesses, there is no evidence that Freshii screened the resumes or did anything other than forward them on to the individual franchises.

Lastly, the Associate General Counsel found no evidence that anyone other than Nutritionality is responsible for determining wages, raises, or benefits of its employees. Freshii’s requirements regarding food preparation, recipes, menu, uniforms, décor, store hours, and initial employee training were not evidence of control over Nutritionality’s labor relations but rather established Freshii’s legitimate interest in protecting the quality of its product and brand.

For these reasons, the Associate General Counsel found that Freshii’s dealings with Nutritionality and/or its employees did not constitute a joint employment relationship under the current NLRB standard.

The General Counsel’s Proposed Joint Employer Standard

In an amicus brief submitted by the NLRB’s General Counsel in the Browning-Ferris Industries, the General Counsel urged the NLRB to return to its traditional joint employer standard. (See Amicus Brief of the General Counsel at 2, 16-17, Browning-Ferris Industries of California d/b/a BFI Newby Island Recyclery, Case 32-RC-109684 (June 26, 2014).) Applying this proposed standard, the Associate General Counsel also found that Freshii was not a joint employer with Nutritionality.

Under the proposed standard, a joint employer is found to exist where, under the totality of the circumstances, the putative joint employer wields sufficient influence over the working conditions of the other entity’s employees such that meaningful bargaining over conditions of employment could not occur in the absence of the putative employer. The General Counsel’s proposed standard makes no distinction between direct, indirect and potential control over working conditions and results in a joint employer finding where “industrial realities” make an entity essential for meaningful bargaining.

Applying this proposed standard, the Associate General Counsel again found that Freshii did not significantly influence the working conditions of Nutritionality’s employees (i.e., “it has no involvement in hiring, firing, discipline, supervision, or setting wages”). Because Freshii does not directly or indirectly control or otherwise restrict the employees’ core terms and conditions of employment, meaningful collective bargaining between Nutritionality and any potential collective-bargaining representative of the employees could occur in Freshii’s absence.

Thus, even under the proposed joint employer standard, the Associate General Counsel concluded that Freshii is not a joint employer with Nutritionality.

What Do We Learn From Freshii?

The conclusions reached in the Advice Memorandum are clearly a positive development for the franchise industry. The NLRB’s recent expansive view of joint employer liability has been viewed by many to seriously threaten the future of the franchise business model. If nothing else, Freshii represents a line in the sand on how far the NLRB is willing to push joint employer liability. 

Whether the Associate General Counsel’s opinions will carry the day is yet to be seen. As mentioned above, the Advice Memorandum does not have the effect of creating law; leaving the ultimate ruling of the NLRB still open for debate. For now, however, franchisors can (and should) make necessary changes to their franchise systems in light of the opinions in Freshii.

For instance, franchisors should institute formal policies announcing their unwillingness to become involved in any unionizing activities of the franchisees’ employees. 

Franchisors would also be wise to focus their training, inspections and advice on business operations and brand standards – not employment matters. While guidance on human resource matters can still be made available via an employee handbook or other means, it must be abundantly clear that each franchisee has the option to adopt the franchisor’s personnel policies and handbook or to employ their own.

Further, franchisors should never get involved in any issues or questions involving the hiring, firing, disciplining, supervising, or compensating of franchisees’ employees. Engaging in any of these topics will quickly set the groundwork for joint employer liability.

And, of course, a franchisor serious about minimizing the risk of potential joint employer liability would be wise to seek the assistance of a seasoned franchise attorney.

* * *

This case report was prepared by Kevin A. Adams (kadams@mulcahyllp.com) of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of franchise, trademark, trade secret, unfair competition, and distribution laws.

Thank you for your continued support of the Committee.

Best regards,

Franchise Law Committee

Co-Chair
Tal Grinblat
Lewitt, Hackman, Shapiro, Marshall & Harlan
tgrinblat@lewitthackman.com

Co-Chair
Grant Nigolian
Grant Nigolian, PC
grant@gan-law.com

Vice Chair, Web and Publications
Kim Lambert
1-800-Radiator.com

June 23, 2015; California Court Refuses To Enforce Texas Forum Selection Clause Without Guarantee Texas Court Would Apply California Law

Contractual forum selection clauses have historically been favored in California so long as they are entered into “freely and voluntarily, and their enforcement would not be unreasonable.” (Smith, Valentino & Smith, Inc. v. Superior Court of Los Angeles County, 17 Cal. 3d 491, 495-96 (Cal. 1976); America Online, Inc. v. Superior Court, 90 Cal. App. 4th 1, 11 (Cal. App. 1st Dist. 2001); Verdugo v. Alliantgroup, L.P., 2015 Cal. App. LEXIS 466, *5-6 (Cal. App. 4th Dist. May 28, 2015)(To be reasonable, the clause must simply have “a logical connection with at least one of the parties or their transaction.”).) This analysis, however, changes when the claims involve unwaivable California statutory rights like those granted to California franchisees as part of the Franchise Investment Law and Franchise Relations Act. (Corp. Code § 31512 (“Any condition, stipulation or provision purporting to bind any person acquiring any franchise to waive compliance with any provision of this law or any rule or order hereunder is void.”); Bus. & Prof. Code § 20010 (“Any condition, stipulation or provision purporting to bind any person to waive compliance with any provision of this law is contrary to public policy and void.”).)

In these instances, California courts have found it “counterintuitive” to accept that California’s laws will be applied by an out-of-state forum resolving a dispute that involves a resident of that forum and a choice-of-law provision compelling the application of that forum’s laws. (Verdugo v. Alliantgroup, L.P., 2015 Cal. App. LEXIS 466 at *24 (citing America Online, Inc., supra, 90 Cal. App. 4th at 14). )

To avoid the contractual circumvention of California’s unwaivable statutes, California courts are making it increasingly more difficult for parties to enforce forum selection clauses. This is evident in the California Appellate Court’s recent decision in the employment law case Verdugo v. Alliantgroup, L.P., 2015 Cal. App. LEXIS 466 (May 28, 2015).

In Verdugo, as discussed below, the California Appellate Court refused to enforce a Texas forum selection clause in an employment agreement because the employer would not guarantee – by stipulation – that the Texas court would apply unwaivable California wage and hour laws to the dispute.

Relevant Factual Background

Defendant Alliantgroup, L.P. (“Alliantgroup”) is a Texas company that provides specialty tax consulting services to businesses throughout the United States. From 2007 to 2013, plaintiff Rachel Verdugo (“Verdugo”) worked as the Associate Director at Alliantgroup’s Irvine, California office.

As a condition of employment, Verdugo entered into an employment agreement that contained a Texas choice-of-law provision and a forum selection clause that designated Harris County, Texas as the exclusive forum for any dispute arising out of her employment with Alliantgroup. 

In April 2013, Verdugo brought a class action lawsuit in California Superior Court asserting numerous claims for wage and hour violations under California’s Labor Code. Alliantgroup immediately moved to dismiss or stay the action in reliance upon the Texas forum selection clause in the employment agreement. The trial court granted the motion and stayed the action finding that the forum selection clause was valid and enforceable.

Verdugo timely appealed, arguing that the trial court erred because enforcing the Texas forum selection clause (and related choice-of-law clause) violated California’s unwaivable law on employee compensation.

Burden Is On Party Seeking Enforcement Of Forum Selection Clause

A party opposing enforcement of a forum selection clause typically bears the burden of showing that the clause is unfair or unreasonable. California courts, however, have reversed the burden – placing it on the party attempting to enforce the forum selection clause – when the underlying claims are predicated upon statutory rights the California Legislature has declared to be unwaivable. (Verdugo v. Alliantgroup, L.P., 2015 Cal. App. LEXIS 466 at *2.) 

The California Appellate court in the franchise case of Wimsatt v. Beverly Hills Weight etc., 32 Cal.App.4th 1511 (1995), is credited with being the first to address which party bears the burden of proof on a motion to enforce a forum selection clause when confronted with unwaivable statutory rights.

In Wimsatt, the franchisee plaintiff sued the franchisor defendant for violation of California’s Franchise Investment Law (“CFIL”). The franchisor moved to dismiss the action pursuant to the out-of-state forum selection clause in the franchise agreement. The trial court granted the motion and the franchisee appealed.

The Appellate Court reversed, holding that the party attempting to enforce a forum selection clause bears the burden to show enforcement of the clause is not unreasonable or unjust “when unwaivable statutory rights are involved because a forum selection clause otherwise could be used to circumvent those unwaivable rights.” (Id. at 10.) In reaching this conclusion, the Appellate Court explained that a forum selection clause carries the potential to contravene unwaivable franchisee protections in the CFIL by placing litigation in a forum in which there is no guaranty that California’s franchise laws will be applied.

Since Wimsatt, California courts have applied the same reversed-burden rational when confronted with forum selection clauses and other California unwaivable statutory rights. ( See, e.g., America Online, Inc. v. Superior Court, 90 Cal.App.4th at 14 (reversing burden of proof to claims under the California Consumer Legal Remedies Act).)

Relying upon Wimsatt and its progeny, the Verdugo court held that – because California Labor Code rights cannot “in any way be contravened or set aside by a private agreement” – the burden of proof shifted to Alliantgroup. (Verdugo v. Alliantgroup, L.P., 2015 Cal. App. LEXIS 466 at *13.)

Alliantgroup Cannot Show Texas Court Would Apply California Law

To meet this burden, Alliantgroup was required to show that the enforcement of the Texas forum selection and choice-of-law clauses would “not in any way diminish Verdugo’s unwaivable Labor Code rights.” (Id. at *29.) According to the Verdugo court, Alliantgroup could have easily satisfied this substantial burden by stipulating to the application of California law – something that Alliantgroup would not do. (Id. at *31.)

Instead, Alliantgroup loosely argued that “[u]nder Texas’ choice of law doctrine, a Texas court would most likely apply California law to Verdugo’s claims notwithstanding the [employment agreement’s] choice of law provision.” (Id. at *29.) The Verdugo court found this “conclusory speculation” to be insufficient to satisfy Alliantgroup’s burden. (Id. (emphasis added); see also, id. at *30 (Noting that, although Alliantgroup “postulate[d]” about what a Texas court was “likely” to do, Alliantgroup carefully avoided making any specific and definitive argument that Texas courts either have applied or will apply California wage and hour laws despite a choice-of-law clause designating Texas law.).)

In the alternative, Alliantgroup argued that the trial court’s ruling should be affirmed because it had stayed rather than dismissed the action. By issuing a stay, Alliantgroup argued that the trial court had retained jurisdiction and could “lift the stay” and proceed with the action if the Texas court later refused to apply California law. Again, the Verdugo court rejected Alliantgroup’s argument.

According to Verdugo court, the Texas court’s application of Texas law would not make Texas an unsuitable forum, and would not “necessarily” allow the California court to lift the stay and resume proceedings on Verdugo’s claims. (Id. at *38.) “If the trial court sought to resume proceedings every time the foreign jurisdiction made an adverse ruling, the unseemly conflicts among jurisdictions that the forum non conveniens doctrine is designed to eliminate would be commonplace.”

Ultimately, Alliantgroup’s failure to stipulate – coupled with its continued downplay of the California labor laws – suggested that Alliantgroup was intending to seek to enforce the Texas choice-of-law provision once the case was moved to Texas. Because of this, the Verdugo court reversed the trial court’s decision and allowed Verdugo’s claims to go forward in California.

Although Verdugo is an employment law matter, the same rationale and analysis should apply to any dispute involving a non-waivable California statute – including those confronting franchise counsel and arising out of the CFIL and California Franchise Relations Act.

* * *

This case report was prepared by Kevin A. Adams (kadams@mulcahyllp.com) of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of franchise, trademark, trade secret, unfair competition, and distribution laws.

Thank you for your continued support of the Committee.

Best regards,

Franchise Law Committee

Co-Chair
Tal Grinblat
Lewitt, Hackman, Shapiro, Marshall & Harlan
tgrinblat@lewitthackman.com

Co-Chair
Grant Nigolian
Grant Nigolian, PC
grant@gan-law.com

Vice Chair, Web and Publications
Kim Lambert
1-800-Radiator.com

May 26, 2015: New Franchise Legislation Passes in Assembly

On May 14, 2015, the California state Assembly passed AB 525, a bill that would amend the existing California Franchise Relations Act (Business and Professions Code §§ 20000 – 20010) (“CFRA”) by expanding the protections for existing franchisees. As currently written, AB 525 would amend the CFRA in the following ways:

  • “Good Cause” Restricted to Substantial Compliance. Under the CFRA, a franchisor is permitted to terminate a franchise prior to the expiration of its term only for “good cause,” which includes (but is not limited to) the failure of a franchisee to comply with any lawful requirement of the franchise agreement after being given notice and an opportunity to cure the failure. Under AB 525, “good cause” would be limited to the failure of the franchisee to substantially comply with the franchise agreement.

  • 60 Day Cure Period. AB 525 would create a mandatory period of at least 60 days for the franchisee to cure a material default under the franchise agreement, which cure period would apply in all but a few defined circumstances.

  • Right of Sale. A franchisor would be prohibited from withholding its consent to the sale of an existing franchise except where the buyer does not meet the franchisor’s standards for new franchisees.

  • Notification of Approval / Disapproval of Proposed Sale. A franchisor would be required to notify the requesting franchisee of its approval or disapproval of a contemplated sale of a franchise within 60 days of receiving from the franchisee certain mandated forms and information regarding the sale. If a franchisor does not provide its written approval or disapproval with the 60 day period, the sale will be deemed to have been approved.

  • Reinstatement or Purchase of Franchise. In the event that a franchisor either terminates or fails to allow the franchisee to renew or sell its franchise in violation of the CFRA, the franchisor would be required to, at the election of the franchisee, either: (a) reinstate the franchise and pay the franchisee damages; or (b) pay the franchisee the fair market value of the franchise and the franchise assets.

  • Monetization of Equity. A franchisee must have the opportunity to “monetize its equity” (obtain the fair market value of the franchise and its assets) prior to the franchise agreement being terminated or not renewed by the franchisor, except under certain limited circumstances.

AB 525 is now in the Senate for consideration.

Thank you for your continued support of the Committee.

Best regards,

Franchise Law Committee

Co-Chair
Tal Grinblat
Lewitt, Hackman, Shapiro, Marshall & Harlan
tgrinblat@lewitthackman.com

Co-Chair
Grant Nigolian
Grant Nigolian, PC
grant@gan-law.com

Vice Chair, Web and Publications
Kim Lambert
1-800-Radiator.com

May 18, 2015: California District Court Decision May Provide Blueprint For Franchisees’ Vicarious Liability Claims Against Franchisors

Late last summer, the California Supreme Court refused to find Domino’s Pizza vicariously liable for the alleged wrongdoing of its franchisee’s employee. The closely divided 4-to-3 decision in Patterson v. Domino’s reflected the Court’s attempt to reconcile the franchise business model with the traditional legal doctrines of agency and vicarious liability. (Patterson v. Domino's Pizza, LLC, 60 Cal. 4th 474 (Cal. 2014).)

Recognizing the universal benefit of systemwide consistency, the Court applied the “means and manner” control test to Domino’s franchise system to determine whether Domino’s possessed the general right to control the relevant day-to-day activities of the franchisee’s employees.

The Court’s application of the “means and manner” control test focused primarily on Domino’s comprehensive operations manual and other materials to evaluate the control, if any, Domino’s reserved over the “hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee’s employees.” (Id. at 497-498.) Following a comprehensive review of these items, the Court ultimately found that no employment or agency relationship existed between Domino’s and its franchisee’s employee. 

Since Patterson, no court applying the “means and manner” control test has found an agency relationship to exist. See Vann v. Massage Envy Franchising LLC, 2015 U.S. Dist. LEXIS 1002, *20 (S.D. Cal. Jan. 5, 2015)(franchisor’s system-wide polices identified in its operations manual assisted in brand uniformity and did not show that the franchisor was a joint employer with its franchisees); De La Sol v. Xerox Corp., 2014 Cal. App. Unpub. LEXIS 6155, 15 (Cal. App. 2014)(contractual requirement that an authorized sales agent use Xerox parts in the service of Xerox machines does not amount to substantial control by Xerox for purposes of vicarious liability); Brunner v. Liautaud, 2015 U.S. Dist. LEXIS 46018, *16 (N.D. Ill. Apr. 8, 2015)(franchisor’s “hands on approach emphasizing uniformity and compliance does not support a determination that [the franchisor] is a joint-employer” with its franchisee); see also, Ambrose v. Avis Rent a Car Sys., 2014 U.S. Dist. LEXIS 170406, *13-14 (C.D. Cal. 2014)(court refused to adopt the means and manner control test for quasi-franchise business model).

These post-Patterson rulings suggest that the application of the “means and manner” control test has made it nearly impossible for plaintiffs to successfully assert vicarious liability against franchisors. However, the U.S. District Court for the Southern District of California’s recent denial of a motion to dismiss in the case of Keller v. Narconon Fresh Start, 2015 U.S. Dist. LEXIS 53596 (S.D. Cal. Apr. 22, 2015), identifies a blueprint that plaintiffs may be able to follow in an attempt to further their agency claims.

In September 2014, plaintiff Christopher Keller and his parents, Curtis and Linda Keller, filed suit for breach of contract and fraud against Narconon Fresh Start (“Fresh Start”), Association for Better Living and Education International (“ABLE”), Narconon International (“NI”), and Narconon Western United States (“NWUS”). (The common “Narconon” name is reflective of a longstanding and famous drug rehabilitation and education program that uses the “secular technology” of L. Ron Hubbard to educate and treat addicts. (Defs.’ Memo of P’s & A’s ISO Mtn to Dismiss, p. 2.) Of course, Mr. Hubbard is also known for founding the Scientology religion.) The claims arise out of Christopher’s experience in a drug rehabilitation program owned and operated by Fresh Start.

According to the complaint, a representative of Fresh Start made several false statements to the plaintiffs concerning the effectiveness of the drug rehabilitation program and the supervision that would be provided to Christopher while he attended the program. Relying upon these alleged representations, the plaintiffs paid a $33,000 program fee and enrolled Christopher in the program.

Christopher ended up leaving the program early because, among other things, he did not feel safe and he believed that the staff was unfit to treat him.

While each defendants’ role in the facts giving rise to the plaintiffs’ claims is not entirely clear, it appears that Fresh Start is a licensee of the Narconon trademark and system, ABLE is the owner of the Narconon trademark and system, and both NI and NWUS are licensees of ABLE, and sub-licensors of the Narconon trademark and system to rehabilitation centers “like” Fresh Start. (Defs.’ Memo. ISO Mtn to Dismiss, p. 3.)

More importantly, the plaintiffs alleged that NI, NWUS, and ABLE (collectively, the “Licensors”) were vicariously liable for the injuries caused by Fresh Start because they “govern and control nearly every aspect of Fresh Start’s business activities.” (Compl. ¶ 71.)

Similar to the Supreme Court’s decision in the Patterson case, the plaintiffs’ allegations focus on the controls granted to the Licensors through various operations manuals governing Fresh Start’s use of the Narconon marks and system. (Pltfs.’ Opp. To Mtn to Dismiss, p. 4 (the manuals are entitled “Running an Effective Narconon Center” and “Opening a Successful Narconon Center”).)

Cherry picking from these operations manuals, the plaintiffs were able to compile a list of significant controls allegedly exerted by the Licensors over the day-to-day operations of Fresh Start’s business, including the following: (1) Fresh Start cannot demote, transfer, or dismiss a permanent staff member without approval from NI; (2) the Licensors have the ultimate authority over the hiring of Fresh Start’s staff members; (3) in the event Fresh Start determines that a staff member is not qualified for the job, that staff member “may petition the Senior Director of Administration at NI to remain on staff”; (4) Fresh Start staff members may file a ‘Job Endangerment Chit’ with NI if they believe Fresh Start has given orders or denied materials that make work difficult; (5) Fresh Start employees are required to report misconduct to NI, which is then investigated by both NI and NWUS; and (6) NI requires Fresh Start to send detailed weekly reports containing statistics of more than 40 metrics, which both NI and NWUS review. (Compl. ¶¶ 73-79.)

In addition to the controls identified in the operations manuals, the plaintiffs also alleged that the Licensors were all intimately involved in Fresh Start’s operations in the following ways: (1) they required Fresh Start to seek their approval before circulating promotional materials and starting new websites; (2) they assisted Fresh Start in creating advertising materials and dictated the materials’ content; (3) they conducted “tech inspections” at Fresh Start to determine whether Fresh Start was delivering the Narconon program correctly; (4) they worked with Fresh Start on legal issues, including patient requests for refunds and complaints to the Better Business Bureau; and (5) they exercised final authority over Fresh Start relating to hiring and firing, delivery of services, finances, advertising, training, and general operations. (Id. at ¶¶ 79-88.)

The Licensors moved to dismiss the complaint, arguing that the plaintiffs’ experience was with Fresh Start – a single licensee – and that the allegations in the complaint are insufficient to establish an agency relationship under the precedent identified in Patterson.

After acknowledging that it had to accept the plaintiffs’ allegations as true for purposes of the motion to dismiss, the district court quickly found that the plaintiffs had alleged facts sufficient to show that the Licensors “control the ‘means and manner’ of Fresh Start’s operations” for purposes of an agency relationship between Fresh Start and the Licensors. (Keller v. Narconon Fresh Start, at *10.)

Unlike the other post-Patterson cases identified above, the Keller lawsuit was initiated in its entirety after the Patterson ruling was announced by the California Supreme Court. This presumably provided the Keller attorneys with an opportunity to mold their complaint to avoid the same control deficiencies identified in Patterson.

By thoroughly dissecting the operations manuals and then pleading each semblance of control reserved by the Licensors over Fresh Start in these documents, the Keller plaintiffs were able to overcome the Patterson plaintiff’s shortcomings and allege facts sufficient to support an agency relationship.  

In light of Keller, franchisees should be encouraged to dissect all of the franchise system materials in search of any language that identifies control by the franchisor. Presenting this language to the court in a vacuum may be enough to overcome the Patterson decision.

Alternatively, franchisors must be even more vigilant in ensuring that their policies and procedures are limited to the protection of their brand and goodwill. Any suggestion that the franchisor is exceeding this limited control could provide fuel for future claims of vicarious liability.

* * *

This case report was prepared by Kevin A. Adams (kadams@mulcahyllp.com) of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of franchise, trademark, trade secret, unfair competition, and distribution laws.

Thank you for your continued support of the Committee.

Best regards,

Franchise Law Committee

Co-Chair
Tal Grinblat
Lewitt, Hackman, Shapiro, Marshall & Harlan
tgrinblat@lewitthackman.com

Co-Chair
Grant Nigolian
Grant Nigolian, PC
grant@gan-law.com

Vice Chair, Web and Publications
Kim Lambert
1-800-Radiator.com

April 21, 2015: Court Denies IFA’s Attempt To Block Seattle’s Expedited Minimum Wage Increases On Franchisees

With the economic turmoil of the Great Recession seemingly in America’s rearview mirror, many lawmakers have turned their attention to raising the pay and improving the job conditions for the minimum wage employees in this country.
The impasse in Washington over President Barack Obama’s push to raise the federal minimum wage from $7.25 to $10.10 has left local municipalities to evaluate the needs of the minimum wage workers in their communities. This has resulted in significant increases to minimum wage floors in an unprecedented number of cities and counties.  (City Minimum Wage Laws, Recent Trends and Economic Evidence on Local Minimum Wages, Nat’l Emp. L. Project, 1 (Dec. 2014), http://www.nelp.org/page/-/rtmw/City-Minimum-Wage-Laws-Recent-Trends-Economic-Evidence.pdf?nocdn=1 (see, e.g., San Jose, $10.15; Santa Fe, $10.66; Washington, DC, $11.50; Oakland $12.25; Chicago, $13.00; San Francisco $15.00).)

On June 3, 2014, the City of Seattle joined the nationwide movement by enacting Ordinance Number 124490 (the “Ordinance”), with the stated design of increasing the wages of over 100,000 Seattle workers unable to support themselves and their families.  (Ordinance, § 1.)

Under the terms of the Ordinance, Seattle-based employers must comply with incremental increases in the city’s minimum hourly wage floor as it increases from $9.47 to $15. The “phase-in” period for the incremental increases may vary in length depending upon the size of the employer.

Schedule 1 Employers – defined as “employers that employ more than 500 employees in the United States” – are given three years to incrementally raise their minimum wages to $15. Alternatively, Schedule 2 Employers – defined as “employers that employ 500 or fewer employees regardless of where those employees are employed in the United States” – are provided seven years to reach the $15 minimum wage floor.  (Ordinance, § 2, “14.19.010 Definitions.”) In other words, Schedule 1 Employers have until 2017 to reach the $15 minimum wage, while Schedule 2 Employers are given until 2021.  (Small businesses were given this extra time because they lack the same resources as large businesses and will face particular challenges in implementing the law. Ordinance, § 1, ¶ 9.)

The 500 employee threshold is not the only differentiating factor between Schedule 1 Employers and Schedule 2 Employers. The Seattle City Council has expressly expanded the definition of Schedule 1 Employer to include any franchisees that are “associated with” franchise networks that “employ more than 500 employees in the aggregate in the United States.”

This expanded definition of Schedule 1 Employers subjects individual franchise operators – often employing only a handful of people – to a more stringent minimum wage phase-in schedule than companies employing up to 499 people. Needless to say, Seattle’s inclusion of franchisees as Schedule 1 Employers has drawn the ire of the franchise community.

International Franchise Association v. City of Seattle
(2015 U.S. Dist. LEXIS 33744 (W.D

Last year, the International Franchise Association and five individual franchise owners in Seattle (collectively, the “IFA”) filed suit in the Western District of Washington in an attempt to compel Seattle to reclassify franchisees as Schedule 2 Employers subject to the longer seven-year minimum wage phase-in schedule.

The complaint was quickly followed by a preliminary injunction motion seeking an order compelling Seattle to “treat franchisees as ‘small’ businesses rather than ‘large’ businesses” for the duration of the lawsuit.  (Int’l Franchise Ass’n, 2015 U.S. Dist. LEXIS 33744 at *5.)

Both the complaint and the preliminary injunction motion raise the same legal arguments. In short, the IFA alleges that the Ordinance (1) discriminates against interstate commerce in violation of the Commerce Clause, (2) violates the Equal Protection Clause, (3) violates the First Amendment, (4) is preempted by the Lanham Act, (5) is preempted by ERISA, and (6) violates the Privileges and Immunities Clause of the Washington State Constitution. 

As explained below, the court rejected the IFA’s arguments in toto and denied the preliminary injunction motion.

Commerce Clause argument rejected because franchisees better positioned to “handle the faster phase-in schedule”

As its first argument, the IFA argued that, by treating two otherwise identical employers differently based solely on the fact that one is affiliated with an interstate franchise, Seattle’s Ordinance violates the Commerce Clause.

The dormant Commerce Clause bars state and local governments from erecting taxes, tariffs, or regulations that favor local businesses at the expense of interstate commerce.  (Int’l Franchise Ass’n, 2015 U.S. Dist. LEXIS 33744 at *13 (internal citation omitted).) According to the court, “[o]ne of its core purposes [of the dormant Commerce Clause] is to prevent states from engaging in economic protectionism – i.e., shielding local markets from interstate competition.”  (Id. at *13-14.)

For a violation of the dormant Commerce Clause to be found, one of the following two scenarios must exist. First, (i) the statute must have a discriminatory purpose or effect, (ii) the state cannot justify the discrimination by showing that it is necessary to achieve a legitimate local purpose, and (iii) there are no reasonable non-discriminatory means for accomplishing the same objective. Second, if the law is non-discriminatory (i.e., no discriminatory purpose or effect), then the plaintiff must show that the burden on interstate commerce is clearly excessive in relation to the putative local benefits.  (Id. at *14 (internal citations omitted).)

Following nearly thirty pages of opinion devoted to the Commerce Clause arguments, the court ultimately rejected the IFA’s argument. In short, the court found that Seattle’s categorization of franchisees as “large businesses” to have been motivated by the understanding that franchisees – as part of a national system with dedicated vendors, preferred pricing and franchisor support – “could handle the faster phase-in schedule” than a local family-run shop without any outside connections.  (Id. at *28.)

Also, the court refused to invalidate the Ordinance because it had a stated design “to assist low wage workers, to decrease the gender gap, and to ensure that workers can better support and care for their families and fully participate in Seattle’s civic, cultural and economic life.”  (Id. at *42.) Because all of these stated objectives are well within the scope of legitimate municipal policy making, the court found the Ordinance survived Commerce Clause scrutiny.

Equal Protection Clause not at issue because Seattle had “rational basis” to classify franchisees as “large businesses”

The IFA’s second claim – violation of the Equal Protection Clause of the Fourteenth Amendment – was rejected by the court more expeditiously than the Commerce Clause claim. In support of this claim, the IFA argued that Seattle’s discrimination against small franchisees was “so contrary to the Ordinance’s own recognition of the need to treat small and large businesses differently that it violate[d] the Equal Protection Clause of the Fourteenth Amendment.” (Pltf’s Mtn. for Prelim. Inj., p. 2 (August 5, 2014).)

For a violation of the Equal Protection Clause to be found, the law treating similarly situated businesses differently cannot express a “rational basis for the difference in treatment.” (Vill. of Willbrook v. Olech, 528 U.S. 562, 564 (2000).)

As reflected above, the court quickly found a “reasonably conceivable state of facts” that provided a rational basis for the classification of franchisees as large businesses. (Int’l Franchise Ass’n, 2015 U.S. Dist. LEXIS 33744 at *45.) Those facts included, among other things, national advertising, use of famous trademarks, market power for purchasing supplies and raw materials, and access to valuable and trustworthy information based upon the experiences of the franchise system.

Because Seattle’s rational basis for differentiating between franchisees and other businesses was so readily apparent to the court, judicial intervention under the Equal Protection Clause was “unwarranted.”  (Id. at *50. )

First Amendment interests do not block Seattle’s rational regulation of economic transactions by commercial associations

As its third ground for injunctive relief, the IFA argued that the faster phase-in schedule violated the franchisees’ freedom of speech and association. Specifically, “[t]he [O]rdinance unconstitutionally burdens fundamental First Amendment rights by penalizing small Seattle businesses for associating with interstate franchise networks and out-of-state franchisors and by penalizing the speech of such franchisees and their franchisors.” (Pltf’s Mtn. for Prelim. Inj., p. 21 (August 5, 2014).)

Again, the court found the IFA’s argument “unconvincing.” Citing to the concurring opinion of former Supreme Court Justice Sandra Day O’Connor in Roberts v. U.S. Jaycees, 468 U.S. 609, 634 (1984), the court explained that “there is only minimal constitutional protection of the freedom of commercial association,” and that in all events, “no First Amendment interest stands in the way of a State’s rational regulation of economic transactions by or within a commercial association.”

Ultimately, the court found that the Ordinance does not penalize speech or association. Rather, “it uses certain factors common to franchises to identify them as one type of business subject to the faster phase-in schedule.” (Int’l Franchise Ass’n, 2015 U.S. Dist. LEXIS 33744 at *52.) Because of this, the IFA could not show a likelihood of success on the merits of its First Amendment claim.

The Court Finds The IFA’s Remaining Claims “Untenable”

The IFA’s remaining claims – i.e., Lanham Act preemption, ERISA preemption, and violation of the privileges and immunities clause of the Washington Constitution – were also rejected by the court.

In sum, the court found (1) the Ordinance does nothing to conflict with the stated purpose of the Lanham Act (The stated purposes of the Lanham Act, identified at 15 U.S.C. § 1127, are to:

[R]egulate commerce within the control of Congress by making actionable the deceptive and misleading use of marks in such commerce; to protect registered marks used in such commerce from interference by State, or territorial legislation; to protect persons engaged in such commerce against unfair competition; to prevent fraud and deception in such commerce by the use of reproductions, copies, counterfeits or colorable imitations of registered marks; and to provide rights and remedies stipulated by treaties and conventions respecting trademarks, trade names, and unfair competition entered into between the United States and foreign nations.);

(2) certain health plan-related provisions of the Ordinance “simply have no impact” on the franchise-related provisions at issue (Int’l Franchise Ass’n, 2015 U.S. Dist. LEXIS 33744 at *55.); and (3) the Washington Constitution was not violated because “nothing in the Ordinance prevents anyone from exercising their right to ‘carry on business.’” (Id. at *63.)

With the court’s denial of each of these remaining claims, the IFA’s request for a preliminary injunction was defeated.

More troubling for the IFA, however, is the likely long-term effect of the adverse ruling. While the issues were presented to the court for a preliminary ruling, the court’s analysis and finding of a “rational basis” for the Ordinance does not appear to be subject to change upon the discovery of additional facts. As a result, the court’s denial of the preliminary injunction motion will likely end the lawsuit.  

Appreciating the gravity of the court’s adverse ruling, the IFA requested a stay of the proceeding pending appeal. This stay was granted by the district court on March 31, 2015.

* * *

This case report was prepared by Kevin A. Adams (kadams@mulcahyllp.com) of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of franchise, trademark, trade secret, unfair competition, and distribution laws.

Thank you for your continued support of the Committee.

Best regards,

Franchise Law Committee

Co-Chair
Tal Grinblat
Lewitt, Hackman, Shapiro, Marshall & Harlan
tgrinblat@lewitthackman.com

Co-Chair
Grant Nigolian
Grant Nigolian, PC
grant@gan-law.com

Vice Chair, Web and Publications
Kim Lambert
1-800-Radiator.com

March 12, 2015: California’s Franchise Relation Act Thwarts Franchisee’s Attempt To Terminate Franchise Agreement

The California Franchise Relations Act (“CFRA”) was enacted by the California legislature to govern the ongoing relationships between franchisors and franchisees in an effort to prevent unfair practices in the termination, renewal or transfer of a franchise.  (Bus. & Prof. Code Sec. 20000 et seq.)  Included in this bundle of CFRA protections is the rule precluding franchisors from unilaterally terminating franchise agreements prior to the expiration of their term, without good cause and providing the franchisee an opportunity to cure.  (Bus. & Prof. Code Sec. 20020.)

While this unilateral termination rule was plainly intended to protect franchisees, there are rare instances in which the protection backfires.  One of these rare instances is present in the recent California Central District case of Fantastic Sams Salons Corp. v. Moassesfar, 2015 U.S. Dist. LEXIS 6934 (January 21, 2015).

As discussed below, in the Fantastic Sams Salons Corp. v. Moassesfar case, the franchisee’s attempt to shield itself from liability by invoking the automatic termination provision in its franchise agreement fails when the district court finds that the notice and opportunity to cure requirements of the CFRA negate any automatic termination.

Fantastic Sams Salons Corp. v. Moassesfar – Factual Background

With over 1,250 franchise locations, Fantastic Sams Salon Corp. (“Fantastic Sams”) is one of the largest full-service haircut and beauty salon chains in the U.S.  In February 2007, Frank and Parvaneh Moassesfar entered into a franchise agreement with Fantastic Sams allowing the Moassesfars to open and operate a Fantastic Sams salon in Tarzana, California.  Later that same year, in November 2007, the Moassesfars entered into a second franchise agreement for a salon in Northridge, California.

The franchise agreements required the Moassesfars to pay weekly licensing and advertising fees to Fantastic Sams.  These fees were to be automatically debited by Fantastic Sams from separate bank accounts for each of the Moassesfars’ salons.

After several years of operating their salons without incident, in January 2011, Fantastic Sams’ attempt to debit the Moassesfars’ weekly fees for the Tarzana salon failed.  This was allegedly due to the Moassesfars closure of the bank account.

Although no fees were being paid on the Tarzana salon, it appears that the Moassesfars continued to pay the licensing and advertising fees for their Northridge salon for another year.  However, in February 2012, this too stopped.

Remarkably, for the next two years, the Moassesfars allegedly continued operating the salons, royalty free, and Fantastic Sams made no effort to enforce the terms of the franchise agreements or collect the past due fees.  Then, on May 30, 2014, Fantastic Sams sent the Moassesfars a notice of default – with a five-day cure period – for both salons.

The Moassesfars failed to cure the defaults and Fantastic Sams filed suit on August 27, 2014.  Shortly after the lawsuit was filed, the Moassesfars stopped operating the salons and the parties entered a stipulation effectively terminating both franchise agreements.  As a result of the stipulation, the only issues before the court concerned Fantastic Sams’ pursuit of damages for breach of contract and trademark infringement.

The Moassesfars Moved To Dismiss Arguing That The Claims Fall Outside The One-Year Contractual Limitations Clauses In The Franchise Agreements

The Moassesfars responded to the complaint by filing a motion to dismiss relying entirely upon automatic termination and contractual limitation provisions in the franchise agreements.  Specifically, the argument raised in the Moassesfars’ motion to dismiss consisted of the following analysis:

First, the Moassesfars cited to paragraph 12(b)(2) of the franchise agreements, which provides that the entire franchise agreement automatically terminates when two consecutive payments are missed.

Second, the Moassesfars argued that, consistent with paragraph 12(b)(2), their franchise agreements automatically terminated – the Tarzana franchise agreement in January 2011 and the Northridge franchise agreement in February 2012 – after they failed to make two consecutive payments in connection with each store to Fantastic Sams.

Third, the Moassesfars relied upon the contractual limitations language at paragraph 13(c) in the franchise agreements, which mandates that “any claim arising out of this Agreement […] shall be brought within […] one (1) year from the date of the act of failure to act.”

Applying the above facts, the Moassesfars concluded that, because the franchise agreements had been terminated for more than a year before Fantastic Sams initiated the instant action, Fantastic Sams was barred from pursing any contract damages.

The Moassesfars similarly argued that Fantastic Sams was barred from pursuing trademark damages because the franchise agreements licensed the Moassesfars to use the Fantastic Sams marks, and when the franchise agreements automatically terminated, Fantastic Sams had only a year to sue for the Moassesfars’ unauthorized use of the marks.

The Moassesfars’ Analysis Conflicted With The California Franchise Relations Act

Though creative, the court found the Moassesfars’ analysis to be flawed at step one – i.e., the automatic termination – because the California Franchise Relations Act (“CFRA”) “prohibits a franchise agreement from automatically terminating without notice to the franchisee and an opportunity to cure.” (Fantastic Sams Salons Corp., 2015 U.S. Dist. LEXIS 6934 at *8 (citing to Cal. Bus. & Prof. Code §§ 20020, 20021.))

The CFRA, at California Business and Profession Code § 20020, states that:

Except as otherwise provided by this chapter, no franchisor may terminate a franchise prior to the expiration of its term, except for good cause. Good cause shall include, but not be limited to, the failure of the franchisee to comply with any lawful requirement of the franchise agreement after being given notice thereof and a reasonable opportunity, which in no event need be more than 30 days, to cure the failure.

The court found that the notice and opportunity to cure requirements of the CFRA negated any automatic termination of the Moassesfars’ franchise agreements notwithstanding the language of paragraph 12(b)(2).

The court also found that the Moassesfars’ argument applied paragraph 12(b)(2) in a vacuum as it contradicted other provisions in the franchise agreements. For instance, the franchise agreements also required the Moassesfars to continue to pay the weekly fees “so long as [the Moassesfars] use[] any part or all of the Fantastic Sams System or the Marks […] whether such use is authorized or not.” (Paragraph 3(b)(1) of the franchise agreements.) Also, each franchise agreement provides that “[i]n no event will termination of this Agreement for any reason relieve Licensee of its obligations, debts or responsibilities accrued under this Agreement.” (Paragraph 12(e) of the franchise agreements.)

Because the Moassesfars continued operating their salons after missing consecutive payments, the court found that they were still obligated under these other provisions in the franchise agreements to continue paying the license and advertising fees to Fantastic Sams.

The One-Year Contractual Limitation Period Did Limit The Scope Of Liability

Although Fantastic Sams defeated the motion to dismiss, it still faced some adverse consequences for neglecting to timely enforce its franchise agreements.

As mentioned above, Fantastic Sams waited more than three years to take any action for the Moassesfars’ missed payments under the Tarzana franchise agreement, and more than two years to act in connection with the violations under the Northridge agreement.  In the meantime, the Moassesfars continued to operate the salons, royalty free.

While the court ultimately found that Fantastic Sams was not barred from pursuing both breach of contract and trademark infringement damages in the case, the court did find that the contractual limitations provision in the franchise agreements barred Fantastic Sams from pursuing any damages that pre-dated one-year before the filing of the lawsuit.

Keep in mind, Fantastic Sams may have gotten off lightly.  Neglect of this nature by a franchisor often not only results in significant lost fees, but also emboldens other franchisees to follow suit, causing irreparable harm to a franchise system.

* * *

This case report was prepared by Kevin A. Adams (kadams@mulcahyllp.com) of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of franchise, trademark, trade secret, unfair competition, and distribution laws.

Thank you for your continued support of the Committee.

Best regards,

Franchise Law Committee

Co-Chair
Tal Grinblat
Lewitt, Hackman, Shapiro, Marshall & Harlan
tgrinblat@lewitthackman.com

Co-Chair
Grant Nigolian
Grant Nigolian, PC
grant@gan-law.com

Vice Chair, Web and Publications
Kim Lambert
1-800-Radiator.com

January 12, 2015: Recent Case Demonstrates Importance Behind Properly Educating Courts On California’s Franchise Laws

Franchise and Distribution Law is one of a handful of legal specialties certified by the California State Bar. Franchising is recognized as a specialty largely in part to the complexities and nuances within state and federal franchise laws – most notably, California’s Franchise Investment Law and Franchise Relations Act.

Notwithstanding this recognized area of legal specialization, lawyers less familiar with franchising are still retained to litigate disputes arising out of franchise or quasi-franchise relationships. Too often, this lack of familiarity results in misapplication of the law and unfavorable outcomes for their clients.

A recent California District Court decision in the case of Estep v. Yung, 2015 U.S. Dist. LEXIS 4475 (E.D. Cal. Jan. 14, 2015), illustrates the importance of qualified franchise counsel to the outcome of a case. As discussed below, the parties’ failure to properly educate the Estep court on California’s franchise laws resulted in a flawed application of the law and adverse outcome for the subfranchisor.

Estep v. Yung – Factual Background

The relevant factual background in this case is straightforward. Defendant HDYR, LLC (“HDYR”) is a Texas-based franchisor of the fast-casual, custom sushi restaurant concept “How Do You Roll?” There are currently twelve How Do You Roll? locations spread across six states – none of which are located in Northern California.

In June 2012, HDYR registered to sell franchises in California. The following year, HDYR entered into an Area Representative Service Agreement (the “AR Agreement”) with Mekadishkem-EBE, Corp. – a company owned and operated by Plaintiffs David and Deanna Estep. In exchange for a payment of $60,000, Plaintiffs’ company was granted the exclusive right to solicit qualified prospective franchisees in a territory comprising much of Northern California, and to develop, support, and provide services to any franchisees in that territory.

In June 2014, Plaintiffs initiated a lawsuit against HDYR and its owner, Yuen Yung, in California Superior Court in Solano County. In their complaint, Plaintiffs assert claims against the Defendants for fraud and breach of contract arising out of HDYR’s alleged (1) pre-sale misrepresentations concerning the activity and interest of California franchise prospects, and (2) breaches of the AR Agreement by failing to provide Plaintiffs’ company with “marketing material, access to sales, advertising and promotional materials.”

After being served with the lawsuit, Defendants timely removed the case to the District Court in the Eastern District of California on diversity grounds.

Forum Selection Clause Designates Out-Of-State Forum

Following removal, Defendants filed a motion to transfer the case to the Western District of Texas consistent with the AR Agreement’s forum selection clause. Specifically, the forum selection clause states that “the exclusive venue for disputes between [the parties] will be the state or federal district courts located in Austin, Texas, and each party waives any objection it might have to the personal jurisdiction of or venue in such courts.”  (Def.’s Mtn. to Transfer, Ex. A, ¶ 17.1 (October 21, 2014)).

Plaintiffs opposed the motion to transfer on several grounds, most notably, on the ground that the out-of-state forum selection clause is void and against California’s “broad” public policy codified in the California Franchise Relations Act (“CFRA”) at Business and Professions Code § 20040.5 (“Section 20040.5”).  (Pl.’s Oppo., p. 1:15-19 (November 20, 2014)).

Section 20040.5 provides that “[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.”

Relying upon this language, Plaintiffs argued that – although the AR Agreement is not a “franchise agreement” – the AR Agreement still falls within the protections set forth in Section 20040.5 because it relates to franchise agreements.

Defendants disagreed, arguing that Plaintiffs could not rely upon Section 20040.5 because the statute has limited applicability to “franchise agreements,” and that the AR Agreement “is not a ‘franchise agreement.’”  (Def.’s Reply Brief, pp. 2:8-10, 5:1-3 (November 24, 2014) (emphasis added)).

The Courts Finds That Section 20040.5 Does Not Apply To AR Agreement

At the onset of its analysis, the court explained that under Ninth Circuit law, contractual forum selection clauses are “presumptively valid” unless: (1) the clause was the result of fraud, undue influence, or overweening bargaining power, (2) the selected forum is so gravely difficult and inconvenient that Plaintiffs would essentially be denied their day in court, or (3) enforcement of the clause would contravene a strong public policy of the forum in which the suit was brought.  (Estep, 2015 U.S. Dist. LEXIS 4475, *3, citing R.A. Argueta v. Banco Mexicano, S.A., 87 F.3d 320, 325 (9th Cir. 1996), and Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1284 (9th Cir. 2006) (“California favors contractual forum selection clauses so long as they are entered into freely and voluntarily, and enforcement would not be unreasonable”)).

Then, turning its attention to the applicability of out-of-state venue prohibition in Section 20040.5, the court found that the AR Agreement “is not a franchise agreement; it is a contract between a small company and a sophisticated area representative who would oversee the solicitation of 30 franchisees.”  (Estep, 2015 U.S. Dist. LEXIS 4475, *3 (emphasis added)).

Based on this finding, the court granted Defendants’ motion to transfer holding that “[t]he California Franchise Relations Act is not on point and it is not enough to outweigh California’s stated policy of favoring contractual forum selection clauses.”  (Id. at *3-4.)

The AR Agreement Is A “Franchise Agreement” Under California Law

Any franchise lawyer presented with this fact pattern is likely to scrutinize the court for “getting it wrong.” However, review of the parties’ briefs suggest that the blame should not fall to the court, but instead, to the parties for failing to properly educate the court on California’s franchise laws.

In particular, the parties failed to enlighten the court on the statutory definitions of “franchise” and “subfranchise” – two definitions that cover the AR Agreement and likely would have resulted in a dramatically different decision by the court.

The term “franchise” is defined by both the CFRA and CFIL as:

[A] contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:

  1. A franchisee is granted the right to engage in a business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and

  2. The operation of the franchisee's business pursuant to such 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

  3. The franchisee is required to pay, directly or indirectly, a franchise fee.  (Corp. Code § 31005(a); Bus. Prof. Code § 20001(a).)

Under this definition, the term “franchise” is synonymous with “franchise agreement.” This is important as Section 20040.5 contains only the term “franchise agreement,” and not “franchise.”

Without going into any significant detail, the terms of the AR Agreement appear to satisfy each of the three prongs defining a “franchise” – i.e., Plaintiffs were granted the right to sell and provide support for How Do You Roll? franchise businesses under the direction of HDYR and in exchange for a fee of $60,000. Thus, the court should have found the AR Agreement to be a franchise under the franchise law.
Moreover, the CFIL and CFRA have expanded the definition of “franchise” to include “subfranchisor” – i.e., “any contract or agreement between a franchisor and a subfranchisor whereby the subfranchisor is granted the right, for consideration given in whole or in part for such right, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor.”  (Corp. Code § 31008-31010; Bus. Prof. Code §§ 20004-20006.)  Because the AR Agreement is a contract granting the Plaintiffs’ business the right to sell franchises in Northern California, it falls within the definition of “subfranchisor.”

Under either definition – i.e., “franchise” or “subfranchise” – the AR Agreement constitutes a franchise agreement under the franchise laws.

Instead of bringing these definitions to the court’s attention, Plaintiffs couched their argument entirely within the language of Section 20040.5, and Defendants’ papers did little more.  (Id., p. 4:16-19 (Defendants cited generally to the definitions of “franchisee” (“a person to whom a franchise is granted”), and “franchisor” (“a person who grants a franchise”) under Cal. Bus. & Prof. Code §§ 31006 and 31007 (erroneously referred to in the brief as § 31107)).  These obvious mistakes by counsel led to the court’s erroneous finding that the AR Agreement is not a franchise agreement and, therefore, not protected by Section 20040.5.

Outside Factors Potentially Influencing The Court’s Decision

To be fair, lack of education alone may not have been the only factor influencing the court’s flawed ruling. Rather, the court’s order suggests that it also may have been influenced by questionable conduct by Plaintiffs’ counsel.

For instance, the court pointed out that, “[c]onveniently, Plaintiffs left off the page of the [AR] Agreement containing [the forum selection clause] in the version of the [AR] Agreement they attached to their Complaint.”  (Estep, 2015 U.S. Dist. LEXIS 4475, *2, fn 2.)

The Court also found Plaintiffs to have “inexplicably sued their own company” as part of what appears to be a failed attempt to defeat diversity jurisdiction.  (Id. at *2, fn 1.)

Finally, the Court was not pleased with Plaintiffs’ argument that the motion to transfer was untimely – noting that the Plaintiffs had “completely ignore[d]” the timing requirements of Federal Rule of Civ. Proc., Rule 81.

Notwithstanding the court’s evident frustration with Plaintiffs, the court would have been hard-pressed to grant the motion to transfer had the court been properly educated on the relvant franchise laws.

* * *

This case report was prepared by Kevin A. Adams (kadams@mulcahyllp.com), of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of antitrust, trademark, copyright, trade secret, unfair competition, franchise, and distribution laws.

Thank you for your continued support of the Committee.

Best regards,

Franchise Law Committee

Co-Chair
Tal Grinblat
Lewitt, Hackman, Shapiro, Marshall & Harlan
tgrinblat@lewitthackman.com

Co-Chair
Grant Nigolian
Grant Nigolian, PC
grant@gan-law.com

Vice Chair, Web and Publications
Kim Lambert
1-800-Radiator.com

January 7,  2015: Court Refuses To Extend Patterson and Juarez Protections To Quasi-Franchise Confronted With Employment Misclassification Claims

For decades, it has been commonplace for non-franchise businesses using a quasi-franchise business model (i.e., any business format license) to distinguish themselves from franchisors in order to avoid the arduous California franchise laws. A recent California district court case suggests that this may be changing – at least when confronted with employee misclassification claims. 

In Ambrose v. Avis Rent a Car Sys. (Ambrose v. Avis Rent a Car Sys., 2014 U.S. Dist. LEXIS 170406 (C.D. Cal. Dec. 8, 2014)), the defendants – owners of an independent operator business model – argued that their business model was “functionally indistinguishable” from a franchise in an attempt to secure the same protections the California Supreme Court recently extended to franchisors in Patterson v. Domino’s Pizza, LLC (Patterson v. Domino's Pizza, LLC, 60 Cal.4th 474 (2014)) . 

As detailed below, while the district court ultimately refused to extend Patterson (and other franchise cases) to the quasi-franchise business model at issue, Ambrose presents a rare instance in which the putative franchisor argues that its business model is indistinguishable from a franchise, while the licensee vehemently opposes the franchisee designation.  At the very least, this shift in arguments suggests that the laws facing franchisors doing business in California are becoming less tendentious.

Ambrose v. Avis Rent a Car Sys. – Relevant Factual Background

In 2006, Tammy Dotson (“Dotson”) entered into an Independent Operator Agreement (the “Operator Agreement”) with Budget Rent A Car System, Inc. (“Budget”) for the operation of a Budget Rent A Car business in Riverside, California.  As a prerequisite to the commencement of her relationship with Budget, Dotson was required to (and did) form a limited liability company in which to operate her new business.  The Operator Agreement identified Dotson’s newly formed entity, Visions Unlimited, LLC, as the “Operator” of the business and made clear that the “Operator is an Independent Contractor” of Budget – and “not a franchise.” 

In a further attempt to avoid the franchise designation, the parties expressly acknowledged that Dotson had not “paid [Budget] a fee for the right to enter into this Agreement.”

Budget Retains Significant Control Over Dotson’s Business

The Operating Agreement required Dotson to hire employees to staff her business, and identified that Dotson – through her LLC – was “solely responsible for all aspects of their employment including compensation, training, staffing and hours/days worked.”  The Operating Agreement also obligated Dotson to carry out the following in the operation of her business:

  • Obtain workers' compensation insurance for the employees;

  • Obtain liability insurance for the business location;

  • Hire only “uniformed, competent and trained . . . [and] capable” employees;

  • Hire a full-time business manager “who is acceptable to [Budget]”;

  • Conduct a driver’s license check on all employees authorized to use a Budget vehicle;

  • Follow Budget rental procedures;

  • Comply with Budget’s credit qualification practices;

  • Accept confirmed car rental reservations;

  • Use Budget-approved forms;

  • Participate in Budget’s Emergency Road Service Program;

  • Pay taxes and cover “the cost of all office supplies and operational expenses at the [business], including . . . stationery, postage, photocopy paper, courier and/or shipping charges, and janitorial services”; and

  • Otherwise “honor Budget standards” and follow Budget’s Agency Operator Guidelines.

Further, the Operator Agreement required all revenue generated by Dotson’s business to first go to Budget, which then calculated the commission owed to Dotson and directly deposited commission checks into Dotson’s bank account.

In addition to Dotson’s contractual obligations, Budget also maintained other significant controls over Dotson’s business. For example, Budget (1) owned and insured all of the rental vehicles, (2) determined which vehicle groups would be made available, (3) supplied Dotson’s business license, (4) leased the Riverside business location, (5) set the minimum rental vehicle rates, (6) paid for the utilities of the business, (7) provided all uniforms for the business, (8) provided a majority of the furniture, computers, office supplies and equipment at the location, (9) provided the software platform needed to process rental reservations, and (10) had authority to accept or approve of Dotson’s advertising practices.  

Between November 2006 and January 2011, Dotson operated the Budget rental car business. During this time, Dotson determined the work hours and rate of pay for her employees and contracted with a third-party payroll provider to handle payroll.

Budget Terminates The Operating Agreement

Although the Operating Agreement did not have an expiration date, it granted both parties the right to terminate without cause upon at least 90 days’ prior written notice. In June 2010, Budget issued two notices to Dotson – a notice of default for “poor performance,” and a termination warning for employee misconduct. Thereafter, providing the required 90 days’ notice, Budget terminated the Operating Agreement, effective January 31, 2011. 

In consideration for the termination, the parties negotiated, and Dotson received, $17,000 – a figure that represented three months’ worth of commissions for the rental car business.

Dotson Files Wage & Hour Lawsuit

In October 2011, Dotson – joined by 21 other individuals and 22 business entities – filed a lawsuit against Budget, Budget’s sister-company Avis Rent A Car (“Avis”), and Budget’s parent company, Avis Budget Group, Inc. (“Parent Company”) (collectively, the “Defendants”) for various wage and hour claims under the premise that the plaintiffs had been misclassified as independent contractors when they were actually employees of Defendants. (Avis was later dismissed from the lawsuit after all plaintiffs that were independent operators of an Avis Rent A Car business settled their claims with Avis.)

During the initial stages of litigation, all of the plaintiffs – with the exception of Dotson – settled and voluntarily dismissed their claims.  

On October 29, 2014, after agreeing that the critical facts were not in dispute, the parties filed competing motions for summary judgment. In her motion, Dotson sought summary judgment on her claim for declaratory relief – seeking a judicial declaration that she was an employee of Budget. Alternatively, Defendants sought summary judgment of Dotson’s entire action arguing, among other things, that the undisputed evidence demonstrated that Dotson was an independent contractor and not an employee.

Defendants Rely Upon The Protections Afforded Franchisors In Patterson And Juarez

At the onset of their motion, the Defendants directed the court to Patterson v. Domino’s Pizza (Patterson v. Domino’s Pizza, LLC, 60 Cal. 4th 474 (2014))and Juarez v. Jani-King of California, Inc.(Juarez v. Jani-King of California, Inc., 2012 U.S. Dist. LEXIS 7406 (N.D. Cal. 2012))in an attempt to convince the court to abandon the common law test for an employment relationship when analyzing a licensor/licensee business model.   

In Patterson, the California Supreme Court found that franchisor Domino’s Pizza could not be held vicariously liable for the workplace injuries allegedly inflicted by one employee of a franchisee on a subordinate employee. In reaching this conclusion, the court acknowledged the economic realities and mutual benefits conferred by franchising and found that “any other guiding principle would disrupt the franchise relationship.” (Patterson v. Domino’s Pizza, LLC, 60 Cal. 4th at 498.)

The district court’s decision in Juarez also expressed an appreciation for the franchise business model and found that the common law presumption of employee status did not apply in the franchise context. Instead, for a franchisor to be relabeled as an “employer,” the “franchisee must show that the franchisor exercised ‘control beyond that necessary to protect and maintain its interests in its trademark, trade name, and good will.’” (Juarez v. Jani-King of California, Inc., 2012 U.S. Dist. LEXIS 7406 at *4 (quoting Cislaw v. Southland Corp., 4 Cal. App. 4th 1284, 1296 (Cal. Ct. App. 1992).

Defendants argued that the deference the Patterson court granted the franchise format and theJuarez court’s finding that the “presumption of employee status” did not apply to franchise relationships should both be extended to the license business format because it is “functionally indistinguishable from franchisees and should be treated as such.” ( Ambrose v. Avis Rent a Car Sys., 2014 U.S. Dist. LEXIS 170406 at 16*.)

By extending Patterson and Juarez to the operator relationship between Dotson and Budget, the Defendants argued that the court would avoid the “false positives” that might result from the court’s application of the common law test for an employment relationship. 

Dotson Contests Defendants’ “Attempt To Re-Cast This Issue Into Something It Is Not”

Dotson argued that the franchise cases of Patterson and Juarez are distinguishable from this case as her Operator Agreement expressly denounced the existence of a franchise relationship and made clear that Dotson did not pay a franchise fee. 

Instead, Dotson relied upon the unpublished Ninth Circuit decision in Adees Corp. v. Avis Rent A Car Sys., Inc. ( Adees Corp. v. Avis Rent a Car Sys., 157 Fed. Appx. 2, 2005 U.S. App. LEXIS 19956 (9th Cir. Cal. 2005)
– which included a similar (if not identical) Operator Agreement to the one at issue in this case. In Adees Corp., an independent operator sought franchisee status in an attempt to avail himself to the protections of the California Franchise Relations Act as it relates to the defendant’s’ termination of the Operator Agreement without good cause. Rejecting the independent operator’s argument, the court found that the governing Operator Agreement did not create a franchise relationship in the absence of a franchise fee. 

Relying upon the Ninth Circuit’s findings in Adees Corp., Dotson argued that she should not be treated as a franchisee where she “does not have the rights and remedies a ‘franchisee’ would have in relation to its ‘franchisor.’” In other words, Defendants should not be able to have their cake and eat it too.

Court Refuses To Extend Patterson And Juarez ToThe “Quasi-Franchise Relationship”

Although acknowledging that the California Supreme Court may someday extend the reasoning of Patterson to the quasi-franchise relationship, the court refused to apply the decisions inPatterson and Juarez to the business format license at issue in this case. 

The court found it to be “undisputed” that Dotson was not availed to the rights and remedies available to a franchisee under the law. Though the court found the payment of a franchise fee to be a “mere formality,” this formality implicated the parties’ substantive rights and served as the basis for the court to refuse to treat Dotson as a franchisee. (Ambrose v. Avis Rent a Car Sys., 2014 U.S. Dist. LEXIS 170406 at 19*.)

After the court refused to apply Patterson and Juarez to the quasi-franchise context, the case came down to the issue of control under the California common law test identified in Alexander v. FedEx Ground Package Sys., Inc. (Alexander v. FedEx Ground Package Sys., Inc., 765 F.3d 981, 988 (9th Cir. 2014) (“The principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired. [Internal quote omitted].”)

Applying the common law control test to the control elements at issue, the court found that, “a reasonable juror could find that [Defendants’] right to control [Dotson’s] work rendered her either an employee or an independent contractor.”  (Ambrose v. Avis Rent a Car Sys., 2014 U.S. Dist. LEXIS 170406 at 28*.)

In light of the competing inferences, the court refused to conclude, as a matter of law, that the Defendants did or did not exercise “all necessary control” over Dotson. (Id.) The parties’ competing motions for summary judgment – to the extent they were based on the issue of whether Dotson was an employee – were denied. 

* * *

This case report was prepared by Kevin A. Adams (kadams@mulcahyllp.com), of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of antitrust, trademark, copyright, trade secret, unfair competition, franchise, and distribution laws. 

Thank you for your continued support of the Committee.

Best regards,

Franchise Law Committee

Co-Chair
Tal Grinblat
Lewitt, Hackman, Shapiro, Marshall & Harlan
tgrinblat@lewitthackman.com

Co-Chair
Grant Nigolian
Grant Nigolian, PC
grant@gan-law.com

Vice Chair, Web and Publications
Kim Lambert
1-800-Radiator.com

November 14, 2014: Frango Grille USA, Inc. v. Pepe’s Franchising Ltd., Business Franchise Guide (CCH) P 15,390 (July 21, 2014)

A district court sitting in California was recently asked to address the enforceability of an out-of-state forum selection clause in a franchise agreement in light of the U.S. Supreme Court’s landmark decision in Atlantic Marine Constr. Co., Inc. v. United States Dist. Court for W. Dist. of Texas, 134 S. Ct. 568 (2013).

As discussed below, the district court circumvented Atlantic Marine by finding that the California Franchise Relations Act (the “CFRA’), at Bus. & Prof. Code § 20040.5, renders the out-of-state forum selection clause invalid and “the Atlantic Marine analysis inapplicable.”

Factual Background

In March of this year, Frango Grille USA, Inc. (“Frango”) commenced a legal action against Pepe’s Franchising Limited and several of its officers, employees, and affiliated companies (collectively, “Pepe’s”) arising out of a failed franchise relationship.

Pepe’s, a United Kingdom company headquartered in Herts County, England, is the franchisor of a quick service chicken restaurant chain operating under the name Pepe’s Piri Piri. Frango is a California corporation with its principal place of business Los Angeles, California.

In early 2012, a representative of Frango visited Pepe’s headquarters to discuss a relationship that would allow the parties to build the Pepe’s brand in California. Following a year of extensive negotiations, on February 21, 2013, Frango and Pepe’s entered into a Master Franchise Agreement (the “MFA”) granting Frango the right to open and operate a Pepe’s Piri Piri restaurant in California, and to recruit other prospective franchisees in California.

Relevant Contract Provisions

The MFA contains a forum selection clause providing that “any proceedings arising out of or in connection with this Agreement shall be brought in any court of competent jurisdiction in London.” The parties also agreed that the MFA would be “governed in all respects in accordance with English Law and shall be construed and take effect as an Agreement made in England.” 

Frango Files the Instant Action

The honeymoon period for Frango and Pepe’s quickly faded, and without opening a single Pepe’s Piri Piri restaurant, Frango filed a lawsuit against Pepe’s with the District Court in the Central District of California. The seven-count complaint included five separate violations of the California Franchise Investment Law (the “CFIL”) and two claims for fraud.

Pepe’s moved to dismiss on grounds of forum non conveniens or, in the alternative, to transfer the case to London. Replying upon the forum selection clause in the MFA, Pepe’s argued that London was the only proper forum for the lawsuit. Frango opposed the motion on the grounds that the out-of-state forum selection clause is invalidated by the CFRA at Bus. & Prof. Code § 20040.5. (Cal. Bus. & Prof. Code § 20040.5 provides that, "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.)

Applicability of the CFRA to the Dispute

In ruling on Pepe’s motion, the court first considered the applicability of the CFRA to the dispute. Pepe’s argued that the CFRA did not apply in this case because (1) Frango was not “operating” a franchise in California as required under the language of Bus. & Prof. Code § 20040.5, and (2) Frango did not bring any claims for violation of the CFRA – only claims for violation of the CFIL and fraud.

The court quickly dismissed both of Pepe’s arguments finding that Frango’s investment of money to prepare to open a Pepe’s Piri Piri restaurant satisfied the requirements under the MFA and the broad legislative intent behind the CFRA. Also, the court found that CFRA claims need not be raised in a dispute for a franchisee to be covered by the protections of the CFRA – i.e., the statute applies to “any claim arising under or relating to a franchise agreement involving a franchise business within this state.”

Relationship of CFRA to Forum Selection Clause

The court next turned its attention to Pepe’s primary argument – that the CFRA provision cannot override the forum selection clause in the MFA in light of the U.S. Supreme Court’s recent decision in Atlantic Marine.

In Atlantic Marine, the Court found that federal courts must analyze the factors laid out in 28 U.S.C. § 1404.  The factors set forth in 28 USCS § 1404 are as follows:

(a)  For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.

(b)  Upon motion, consent or stipulation of all parties, any action, suit or proceeding of a civil nature or any motion or hearing thereof, may be transferred, in the discretion of the court, from the division in which pending to any other division in the same district. Transfer of proceedings in rem brought by or on behalf of the United States may be transferred under this section without the consent of the United States where all other parties request transfer.

(c)  A district court may order any civil action to be tried at any place within the division in which it is pending.

(d)  Transfers from a district court of the United States to the District Court of Guam, the District Court for the Northern Mariana Islands, or the District Court of the Virgin Islands shall not be permitted under this section. As otherwise used in this section, the term "district court" includes the District Court of Guam, the District Court for the Northern Mariana Islands, and the District Court of the Virgin Islands, and the term "district" includes the territorial jurisdiction of each such court.)

In deciding whether to enforce a forum selection clause. The Court also interpreted Atlantic Marine as holding, “where a valid forum selection clause is at issue, the private interest factors are to be disregarded, and ‘a district court may consider arguments about public-interest factors only.’”

Then, relying upon M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), and Jones v. GNC Franchising, Inc., 211 F.3d 495, 498 (9th Cir. 2000), the court found that the forum selection clause to be contrary to California’s strong public policy codified in the CFRA. Because the Atlantic Marine analysis “presupposes a contractually valid forum-selection clause,” and the forum selection clause at issue was rendered invalid because it “would contravene a strong public policy of California,” the court found the Atlantic Marine analysis to be “inapplicable.”

Forum Non Conveniens Analysis

Finding the forum selection clause invalid, the court then conducted a forum non conveniens analysis without considering the forum selection clause. For purposes of this analysis the court acknowledged that it must (1) “evaluate both the convenience of the parties and various public-interest considerations” and “decide whether, on balance, a transfer would serve the convenience of parties and witnesses and otherwise promote the interest of justice.” In addition, the court also considers “the relevant public policy of the forum state.”

Although recognizing that “most of the MFA negotiations took place in England,” the court denied Pepe’s motion to dismiss finding that Pepe’s (1) decision to do business in California, (2) registration to do business in California, (3) knowledge that the forum selection clause was not likely enforceable under California law, (4) knowledge that “disputes arising out of or concerning” the parties’ contracts and relationship would be litigated here.

In light of these facts – and some circular reasoning in its analysis – the court found that Pepe's “failed to make ‘a strong showing of inconvenience to warrant upsetting [Frango’s] choice of forum.’”

* * *

This case report was prepared by Kevin A. Adams (kadams@mulcahyllp.com), of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of antitrust, trademark, copyright, trade secret, unfair competition, franchise, and distribution laws.

Thank you for your continued support of the Committee.

Best regards,

Franchise Law Committee

Co-Chair
Tal Grinblat
Lewitt, Hackman, Shapiro, Marshall & Harlan
tgrinblat@lewitthackman.com

Co-Chair
Grant Nigolian
Grant Nigolian, PC
grant@gan-law.com

Vice Chair, Web and Publications
Kim Lambert
1-800-Radiator.com