Court Watch

After first stating that forum selection clauses are presumptively valid in California, only being unenforceable if obtained by fraud, undue influence or unequal bargaining power, or is so difficult and inconvenient as to deny the plaintiff its day in court or is contrary to a strong public policy of the forum in which the suit was brought, the District Judge dismissed the plaintiffs' argument that the public policy reflected in Section 20040.5 of the CFRA required that the matter remain in California. The court stated that the Area Representative Agreement was not a 'franchise agreement' as required by the CFRA because it was merely a 'contract' between a small company ' the restaurant entity ' and 'a sophisticated area representative.”

It is unlikely that the court was trying to create a new definition of 'franchise' based on the relative size of the parties. It is more probable that the plaintiffs' attorneys did not sufficiently educate the court regarding California franchise law and the court, on its own, did not do independent research to make the required determination. Besides the clear terms in the CFRA, it could have been pointed out by counsel that the Franchise Disclosure Document (FDD) registered by the defendant entity prior to the transaction stated on its cover page: 'The franchises offered are for ' 2) the establishment of an area representative business to perform certain franchise sales and support services for franchised restaurants.' In addition, the FDD disclosed various provisions of the Area Representative Agreement in the FDD's various disclosure items. Clearly, the franchising entity knew that the Area Representative Agreement would be considered a franchise under California law at the time it filed its FDD. That it was not pointed out to the court that now claimed it was not a franchise is puzzling. Also, the California addendum to the FDD contained the proviso required by what was then the California Department of Corporations that the clause requiring disputes to be resolved in Texas 'may be unenforceable under California law'.

It is rather mind-boggling that the court found it was only dealing with a 'contract' and not a 'franchise agreement.' Hopefully, other courts will not draw the same conclusion using this case as precedent.

Franchisee Argues'For Automatic Termination Under CFRA

In Fantastic Sams Salons Corp. v. Moassesfar, Wolters Kluwer (Bus.Fran.Guide) '15,446 (C.D. Cal. Jan. 21, 2015), the franchisee found itself in the unusual position of arguing that its franchise agreement was automatically terminated under the CFRA, and that it was unnecessary to give it the required notice of termination. How did this reversal of roles come about? About four years before suit was brought, the franchisor's attempts to draft royalty fees from the franchisee's bank account for two franchises failed because the account was closed. Under the franchise agreement, if the franchisee's bank failed to honor any prepayment arrangement or bank draft for two consecutive weeks, the franchise agreement was automatically terminated without notice. Notwithstanding the automatic termination, the franchisee continued to operate as a Fantastic Sams salon without paying any royalties for almost four years, and the franchisor did nothing to collect them until it filed suit for past due royalties and trademark violations.

The Franchise Agreement contained a contractual statute of limitations of one year from the date of the act or failure to act. The franchisee argued that the Franchise Agreement was automatically terminated and the termination triggered the commencement of the limitations period. Since the action was not brought until over three years later, the franchisee argued that it was barred. The court agreed. Hoping to find some meaning for the automatic termination provision, it determined that if it did not automatically terminate the franchise agreement, it was the predicate to trigger an acceleration clause which, on termination, required the franchisee to 'pay immediately, all fees ' for so long as the Marks are used ' until the expiration date ' .' The Franchise Agreement also provided that the franchisee was obligated to pay royalties through the term of the agreement whether authorized or not. Taking all of this together, and based on the franchisor's admission that it was only seeking royalties for the year prior to suit, the court ruled that the franchisor was only entitled to obtain royalties for the year preceding the suit due to the contractual limitations period.

An argument presumably not raised by the franchisee is that that if in fact future royalties due were accelerated at the time of the 'automatic termination,' the franchisor would only have one year from that date to bring suit. Franchisors with similar provisions or considering adopting such provisions should take that into consideration.

GA Court Sends'Determination of'Whether a Distributor'Is a Dealer to Jury

Whether a distributor and manufacturer have a sufficient community of interest to cause the Wisconsin Fair Dealership Law (WFDL) to apply sounds like a question a judge should decide. See, Updated 2013−14 Wis. Stats., Ch. 135.01 et. seq. Not so, said a federal district judge in Atlanta, who denied a motion for summary judgment by the manufacturer on the issue of community of interest. Cliff Detemple d/b/a Turning Point Systems Group v. Leica Geosystems, Inc., Wolters Kluwer (Bus. Fran. Guide) '15,460 (N.D. Ga. Feb. 9, 2015). Even though the dealer conducted business in Wisconsin, and was seeking protection under the WFDL claiming wrongful termination, it presumably felt compelled to sue the manufacturer in its home state of Georgia due to an exclusive jurisdiction provision in the distributorship agreement. The WFDL did not prohibit such forum selection provisions, and the federal court in Georgia had no problem deciding the case under Wisconsin law.
Normally, courts decide whether a particular relationship is a franchise or dealership covered by statutes designed to protect dealers or franchisees because it is an issue where there are rarely disputed facts. In the Determple case, in determining that a jury should decide, the court may have been influenced by the numerous factors (at least 10) that had to be taken into consideration to make that determination. The opinion mentioned the 10 non-exhaustive factors that were outlined in Ziegler Co., Inc. v. Rexnord, Inc., 407 N.W.23 873, 874 (Wis. 1987), that should be taken into consideration, and then concluded that there were issues of fact to be determined in order to decide if termination of the business relationship would have a significant economic impact on the dealer.

One factual 'dispute' mentioned by the court was the percentage of revenue derived from the manufacturer's products. Since that is something within the dealer's control, it would not appear to be in dispute and something that can be obtained from the recorded sales. Another 'factual' issue was the amounts invested in purchasing the building housing the dealer. Again, this on its face does not appear to be a factual issue. Similarly, the dealer's advertising expenses does not appear on its face to be something that would be in dispute. The court likely was treating the assessment of the significance of these factors as an issue of fact to be determined by the jury.

The issue of whether the plaintiff is a franchisee or covered dealer frequently arises to either prevent termination or recover damages for wrongful termination. It will continue to arise since there is no fine line as to whether the arrangement satisfies the various factors that must be taken into consideration. The underlying issues are rarely disputed. The core issue is the overall assessment, taking into consideration the usually undisputed factors. That assessment should normally be made by a court. Just because the decision embodies an overall assessment of many factors does not mean that there are disputed facts. Time will tell as to how a jury will deal with these issues, and drafting jury instructions will not be an easy task.

Charles G. Miller, a member of this newsletter's Board of Editors, is shareholder and director of Bartko, Zankel, Bunzel & Miller in San Francisco. Darryl A. Hart is an attorney with the firm. They can be reached at 415-956-1900 or at [email protected] and [email protected], respectively.

CA District Court'Misconstrues State'Franchise Relations'Act in Granting Transfer Motion

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.

After first stating that forum selection clauses are presumptively valid in California, only being unenforceable if obtained by fraud, undue influence or unequal bargaining power, or is so difficult and inconvenient as to deny the plaintiff its day in court or is contrary to a strong public policy of the forum in which the suit was brought, the District Judge dismissed the plaintiffs' argument that the public policy reflected in Section 20040.5 of the CFRA required that the matter remain in California. The court stated that the Area Representative Agreement was not a 'franchise agreement' as required by the CFRA because it was merely a 'contract' between a small company ' the restaurant entity ' and 'a sophisticated area representative.”

It is unlikely that the court was trying to create a new definition of 'franchise' based on the relative size of the parties. It is more probable that the plaintiffs' attorneys did not sufficiently educate the court regarding California franchise law and the court, on its own, did not do independent research to make the required determination. Besides the clear terms in the CFRA, it could have been pointed out by counsel that the Franchise Disclosure Document (FDD) registered by the defendant entity prior to the transaction stated on its cover page: 'The franchises offered are for ' 2) the establishment of an area representative business to perform certain franchise sales and support services for franchised restaurants.' In addition, the FDD disclosed various provisions of the Area Representative Agreement in the FDD's various disclosure items. Clearly, the franchising entity knew that the Area Representative Agreement would be considered a franchise under California law at the time it filed its FDD. That it was not pointed out to the court that now claimed it was not a franchise is puzzling. Also, the California addendum to the FDD contained the proviso required by what was then the California Department of Corporations that the clause requiring disputes to be resolved in Texas 'may be unenforceable under California law'.

It is rather mind-boggling that the court found it was only dealing with a 'contract' and not a 'franchise agreement.' Hopefully, other courts will not draw the same conclusion using this case as precedent.

Franchisee Argues'For Automatic Termination Under CFRA

In Fantastic Sams Salons Corp. v. Moassesfar, Wolters Kluwer (Bus.Fran.Guide) '15,446 (C.D. Cal. Jan. 21, 2015), the franchisee found itself in the unusual position of arguing that its franchise agreement was automatically terminated under the CFRA, and that it was unnecessary to give it the required notice of termination. How did this reversal of roles come about? About four years before suit was brought, the franchisor's attempts to draft royalty fees from the franchisee's bank account for two franchises failed because the account was closed. Under the franchise agreement, if the franchisee's bank failed to honor any prepayment arrangement or bank draft for two consecutive weeks, the franchise agreement was automatically terminated without notice. Notwithstanding the automatic termination, the franchisee continued to operate as a Fantastic Sams salon without paying any royalties for almost four years, and the franchisor did nothing to collect them until it filed suit for past due royalties and trademark violations.

The Franchise Agreement contained a contractual statute of limitations of one year from the date of the act or failure to act. The franchisee argued that the Franchise Agreement was automatically terminated and the termination triggered the commencement of the limitations period. Since the action was not brought until over three years later, the franchisee argued that it was barred. The court agreed. Hoping to find some meaning for the automatic termination provision, it determined that if it did not automatically terminate the franchise agreement, it was the predicate to trigger an acceleration clause which, on termination, required the franchisee to 'pay immediately, all fees ' for so long as the Marks are used ' until the expiration date ' .' The Franchise Agreement also provided that the franchisee was obligated to pay royalties through the term of the agreement whether authorized or not. Taking all of this together, and based on the franchisor's admission that it was only seeking royalties for the year prior to suit, the court ruled that the franchisor was only entitled to obtain royalties for the year preceding the suit due to the contractual limitations period.

An argument presumably not raised by the franchisee is that that if in fact future royalties due were accelerated at the time of the 'automatic termination,' the franchisor would only have one year from that date to bring suit. Franchisors with similar provisions or considering adopting such provisions should take that into consideration.

GA Court Sends'Determination of'Whether a Distributor'Is a Dealer to Jury

Whether a distributor and manufacturer have a sufficient community of interest to cause the Wisconsin Fair Dealership Law (WFDL) to apply sounds like a question a judge should decide. See, Updated 2013−14 Wis. Stats., Ch. 135.01 et. seq. Not so, said a federal district judge in Atlanta, who denied a motion for summary judgment by the manufacturer on the issue of community of interest. Cliff Detemple d/b/a Turning Point Systems Group v. Leica Geosystems, Inc., Wolters Kluwer (Bus. Fran. Guide) '15,460 (N.D. Ga. Feb. 9, 2015). Even though the dealer conducted business in Wisconsin, and was seeking protection under the WFDL claiming wrongful termination, it presumably felt compelled to sue the manufacturer in its home state of Georgia due to an exclusive jurisdiction provision in the distributorship agreement. The WFDL did not prohibit such forum selection provisions, and the federal court in Georgia had no problem deciding the case under Wisconsin law.
Normally, courts decide whether a particular relationship is a franchise or dealership covered by statutes designed to protect dealers or franchisees because it is an issue where there are rarely disputed facts. In the Determple case, in determining that a jury should decide, the court may have been influenced by the numerous factors (at least 10) that had to be taken into consideration to make that determination. The opinion mentioned the 10 non-exhaustive factors that were outlined in Ziegler Co., Inc. v. Rexnord, Inc. , 407 N.W.23 873, 874 (Wis. 1987), that should be taken into consideration, and then concluded that there were issues of fact to be determined in order to decide if termination of the business relationship would have a significant economic impact on the dealer.

One factual 'dispute' mentioned by the court was the percentage of revenue derived from the manufacturer's products. Since that is something within the dealer's control, it would not appear to be in dispute and something that can be obtained from the recorded sales. Another 'factual' issue was the amounts invested in purchasing the building housing the dealer. Again, this on its face does not appear to be a factual issue. Similarly, the dealer's advertising expenses does not appear on its face to be something that would be in dispute. The court likely was treating the assessment of the significance of these factors as an issue of fact to be determined by the jury.

The issue of whether the plaintiff is a franchisee or covered dealer frequently arises to either prevent termination or recover damages for wrongful termination. It will continue to arise since there is no fine line as to whether the arrangement satisfies the various factors that must be taken into consideration. The underlying issues are rarely disputed. The core issue is the overall assessment, taking into consideration the usually undisputed factors. That assessment should normally be made by a court. Just because the decision embodies an overall assessment of many factors does not mean that there are disputed facts. Time will tell as to how a jury will deal with these issues, and drafting jury instructions will not be an easy task.

Charles G. Miller, a member of this newsletter's Board of Editors, is shareholder and director of Bartko, Zankel, Bunzel & Miller in San Francisco. Darryl A. Hart is an attorney with the firm. They can be reached at 415-956-1900 or at [email protected] and [email protected], respectively.