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It’s Not Where You Could Go but Where You Are When It Comes To Applying State Franchise Laws

by on Breach of Contract

When a coffee chain sought the protection of various state franchise laws, they found out it wasn’t about where they were planning to go but about where they were operating. A New York federal court rejected a coffee chain’s efforts to seek the protection of the California Franchise Investment Law and other states’ franchise laws. In Keurig Green Mountain, Inc. v. Global Baristas U.S., LLC, No. 18-CV-0095 (LAK), 2018 WL 4926446 (S.D.N.Y. Oct. 10, 2018), the court granted Keurig’s motion to dismiss Global Baristas’ counterclaims which centered on the argument that Keurig had failed to comply with franchise laws across the country.

Sometimes Companies Can Fall Under Franchise Disclosure and Investment Laws Without Knowing It

Keurig is a coffee company that markets “K-CUP” pods that are used with Keurig brewers. Keurig’s products are marketed and sold through distributors, retail sellers, and direct channels. On July 21, 2014, Global Baristas entered into a trademark license agreement (the “Agreement”), granting it an exclusive, non-transferable license to use the “TULLY’S” trademarks to sell coffee and retail products at licensed stores.

Eventually, Keurig brought a lawsuit against Global Baristas for breach of the Agreement based on Global Baristas (1) failure to pay annual royalty fees; and (2) use of advertising material never approved by Keurig. Keurig alleged that it sent Global Baristas a formal notice of breach and demand for payment on October 27, 2017, and that Global Baristas failed to cure the breach within thirty days, resulting in the automatic termination of the Agreement on December 1, 2017.

Global Baristas claimed that the Agreement was in fact a franchise agreement and that it had been sold a franchise. Global Baristas filed its counterclaims, centered on its contention that Keurig failed to register and disclose a franchise in violation of multiple state statutes: California, Hawaii, Michigan, North Dakota, Rhode Island, and Virginia.
However, Global Baristas did not operate in each of these states. Instead, Global Baristas contended that because it was granted the development rights to operate in each of the states, it was therefore entitled to the protection of their franchise laws. The parties did not dispute whether the Agreement was a franchise agreement but whether Keurig was required to comply with franchise disclosure laws in various states.

Determining Which States’ Franchise Laws Apply

The court first reviewed California law. It cited Section 31110 of the California Business and Professions Code, which makes it “unlawful for any person to offer or sell any franchise in this state unless the offer of the franchise has been registered…” Under Section 31013, an “offer or sale of a franchise is made in this state when an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state.”

Global Baristas was domiciled or based in Washington, not California, and so any offer would have been directed to and accepted in Washington. Similarly, any offer for sale or sale would have originated from Delaware or Vermont, Keurig’s state of incorporation and principal place of business, not California. The court thus noted that Keurig did not make the offer from California and Global Baristas did not accept it in California.

This left the last prong, “if the franchisee is domiciled in this state, the franchised business is or will be operated in this state.” The court noted that even if Global Baristas was to operate a franchise in California at some point in the future that would not be enough, since it was not domiciled in California. The court thus held that Global Baristas had failed to state a claim under the CFIL.

Michigan, North Dakota, and Rhode Island had the same statutes as California and thus those claims were also subject to dismissal. Hawaii differed only in that it specifically exempted offers or sales where the franchisee is not domiciled in Hawaii and will not be operated in Hawaii. As Global Baristas was not domiciled in any of these states, each of these claims were subject to dismissal.

Virginia’s Retail Franchise Act was worded differently. It applies “only to a franchise the performance of which contemplates or requires the franchisee to establish or maintain a place of business within the Commonwealth of Virginia.” The Supreme Court of Virginia has interpreted this language as requiring a link to the State of Virginia, although a brick and mortar site is not necessary. The court held that the assertion that Global Baristas merely had a right to operate a franchise there (in addition to anywhere in the United States) did not satisfy this requirement.

The only franchise law that did arguably apply was the Washington Franchise Investment Act as Global Baristas was domiciled there. However, that Act did not have a specific statute of limitations. Rather than apply the 6-year statute of limitations for breach of contract or 3-year statute of limitations for fraud, the court held that the failure to register fell under the 2-year catchall statute of limitations. Thus, because the lawsuit was filed over three years later, it was time-barred. However, the court did allow Global Baristas to keep an affirmative defense on similar grounds because it was not clear whether the statute of limitations would apply to affirmative defenses. And thus, Global Baristas was left with a glimmer of hope that franchise law might protect it.

* Originally published in different form in the California Lawyers Association, Business Law Section, Franchise Law Committee, Case Report, October 2018

Work With an Experienced Franchise Lawyer

Whether you are not properly classified as a franchise or are facing a franchisor’s breach of contract, it is important to speak with an experienced franchise lawyer who can help guide you. We are experienced in advising franchisees and franchisors on state franchise investment laws from California to the East Coast and everywhere in between. If you need assistance, contact Luther Lanard, PC, to schedule a consultation.