Venue and Choice of Law Provisions Not Enforceable in California
bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
October 2014
American Bar Association Franchise Legal Seminar
Barry Kurtz, David Gurnick, Tal Grinblat and Bryan H. Clements attended the American Bar Association’s annual legal seminar for franchise attorneys. The seminar provides an opportunity for attendees to focus on industry-wide legal concerns. Barry Kurtz co-chaired a special industry relationship workshop on beer distribution, oil and gas and automobile dealership law.
David Gurnick Named one of the Best Lawyers in America 2015
David Gurnick was recently selected by his peers for inclusion in The Best Lawyers in America 2015, for Franchise Law. The list was published in a special supplement to the Wall Street Journal earlier this month. Click: Best Lawyers to see the listing.
Los Angeles Franchise Panel Discussion
Barry Kurtz participated in a panel discussion and Q&A for potential franchisors, franchisees, business attorneys and accountants in Southern California regarding the A-Zs of franchising a business, buying a franchise, accessing capital, and other topics. The breakfast event was hosted by The Los Angeles Business Journal on October 3rd.
California Bar Business Law Leadership Conference
Tal Grinblat, representing the State Bar of California Franchise Law Committee, participated in a two day leadership conference hosted by the Business Law Section in Dana Point, California. The conference addressed steps to improve the Committee, sponsorship of legislation, and the promotion of the Business Law Section of the Bar.
Barry Kurtz published in The Los Angeles Business Journal
Franchising is a flexible, tried and true method of distributing products and services and offers business owners an alternative avenue to expand… To read more, click: Is Franchising the Right Model for Your Business?
FRANCHISOR 101:
Venue and Choice of Law Provisions Not Enforceable in California
In 2013, Pepe’s Franchising, a U.K. company, entered into a Master Franchise Agreement with Frango Grill, based in California, granting the right to operate and franchise Pepe’s restaurants in California. The Agreement’s venue clause required all disputes to be brought in London, where Pepe’s was headquartered, and required U.K. law to apply.
In 2014, Frango sent a letter to Pepe’s stating its intent to rescind the Master Franchise Agreement. Frango sued Pepe’s in Los Angeles alleging franchise law claims. Pepe’s moved to dismiss the action or move it to London pursuant to the Agreement’s venue clause. Frango, citing California’s Franchise Relations Act (CFRA), opposed Pepe’s motion, claiming the California statute trumped the Agreement’s venue requirements. Section 20040.5 of the CFRA states 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.
Pepe’s argued the CFRA should only apply when it would be unfair to apply the forum selection clause. The court ruled that the statute covers all venue restrictions, not just clauses imposed unfairly, and held that due to California’s strong public policy, Section 20040.5 invalidated the agreed forum for resolving disputes. The court also held that California law would apply despite contrary provisions of the Master Franchise Agreement because Pepe’s admitted that the laws of both jurisdictions were the same.
Furthermore, the court found that Pepe’s sought to do business in California and registered its franchise disclosure document in California. Therefore, Pepe’s should have contemplated that any franchisee dispute would be litigated in California.
When dealing with franchisees in multiple jurisdictions, a franchisor should not assume that its choice of law and forum agreement will be enforced. Review of the laws in jurisdictions where franchises are granted may be useful to assess risks related to the parties’ selected forum and choice of law.
Franchisors should also consider the benefits of filing lawsuits preemptively against non-compliant franchisees in the jurisdiction stated in the franchise agreement to lessen the risk of litigating disputes in the franchisee’s choice of forum.
To read about the case, click: Frango Grille USA Inc., v. Pepe’s Franchising Ltd.
FRANCHISEE 101:
Illusory Arbitration Provisions Not Enforceable in Indiana
In 2010, Steak ‘n Shake, a franchisor of hamburger restaurants, adopted new pricing and promotion policies that required all franchisees to follow company mandated pricing on every menu item and to participate in all promotions mandated by the franchisor.
Three franchisees resisted this policy, claiming that all Steak ‘n Shake franchisees enjoyed the right to set their own menu prices and participate in corporate pricing promotions at their option since 1939. They sued the franchisor in federal court.
One month later, Steak ‘n Shake adopted an arbitration policy requiring franchisees to engage in non-binding arbitration of all disputes at Steak ‘n Shake’s request. Then Steak ‘n Shake moved to stay the federal lawsuit and compel arbitration based on a provision in its franchise agreement that granted Steak ‘n Shake the right to initiate a system of non-binding arbitration and mediation at any time.
The court denied Steak ‘n Shake’s motion, holding that the arbitration clause was illusory and unenforceable because there was no limit on Steak ‘n Shake’s ability to arbitrate at its whim and, as a result, it was purely optional. An illusory promise is one that makes performance entirely optional with the promisor.
On appeal, Steak ‘n Shake argued that the arbitration provision was not illusory. The appellate court disagreed, holding that Steak ‘n Shake did not satisfy an essential requirement needed to compel arbitration: a clear agreement to arbitrate. The appellate court found the arbitration agreement was illusory because performance of the arbitration provision was optional to Steak ‘n Shake and the provisions were so vague and indefinite that the material terms could not be determined.
All parties can benefit from reviewing the franchise agreement’s arbitration provisions to determine whether to proceed in a dispute through litigation or arbitration. Though an agreement may require arbitration, if its terms are illusory or ambiguous, it may be possible to pursue claims in court.
For more information, click: Appellate Court’s opinion for Steak ‘n Shake Enterprises, Inc.