Court Watch

In Estep et al v. Yung et al, Bus. Franchise Guide (CCH) '15,452 (USDC, E.D. California, Jan. 13, 2015) the court considered a motion to transfer a suit filed in California to Texas. The plaintiffs are personal guarantors of an agreement between their California corporation, Mekaddishken-Ebe, and HDYR, LLC, the operator of a sushi restaurant in Austin, TX, called 'How Do You Roll?'. In a bizarre move, the plaintiffs sued in their individual names, naming their own corporation as a defendant, in an apparent and unsuccessful attempt to defeat diversity jurisdiction.

In May, 2013, the plaintiffs' corporation entered into an Area Representative Agreement with the defendant entity under which the plaintiffs' corporation was to solicit franchises for How Do You Roll? restaurants in Northern California. Pursuant to the California franchise registration in effect at the time of the transaction, the plaintiffs' entity paid $60,000 for these rights, and committed to franchise and open 30 restaurants in the grant territory. Things apparently soured and in June, 2014, the plaintiffs filed suit alleging fraud and breach of contract against the defendant entity and its founder, Yuen Yung. After removing the action to federal court, the defendants sought to enforce the forum selection clause in the agreement that specified that disputes were to be resolved by the courts located in Austin.
Section 20040.5 of the California Franchise Relations Act (CFRA), Cal. Bus. & Prof. Code Secs. 20000 ' 20043, 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.'
The CFRA defines 'franchise' as a contract or agreement containing the California definitional elements: a business offering or selling goods or services under a marketing plan or system that is substantially associated with the grantor's name or mark and the payment of a franchise fee. Under the Area Representative Agreement, the plaintiffs were given the right to go into the business of offering and selling franchises using the grantor's names and marks under the requirements specified by the grantor. For this right, they paid $60,000. If that was not clear enough to make the transaction a franchise, Section 20006 of the CFRA says: ”Franchise' includes 'area franchise” and Section 20004 defines 'Area Franchise' as a contract or agreement where one is granted the right, for consideration, 'to sell or negotiate the sale of franchises in the name or on behalf of the franchisor.' All the plaintiffs had to do, then, was show that the Area Representative Agreement was a 'franchise agreement' and it's a slam dunk for the plaintiffs seeking to keep the case in California, right? Not when the court finds that the Area Representative Agreement was not a franchise agreement under the CFRA.