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You Have to Show You’re a Franchisee Before the California Franchise Relations Act Will Override a Forum Selection Clause

by on General

Where you have to litigate a case can have large ramifications on the likelihood of success. The contractual clause often at issue is called a forum selection clause. Forum selection clauses can often prevent franchisees from bringing their claims in the jurisdiction where the franchise is located instead mandating that the case be brought in the franchisor’s chosen jurisdiction. However, the California Franchise Relations Act contains some protections for franchisees if you can establish you are a franchisee.

You Must Properly Allege a Franchise to Obtain the Benefits of the California Franchise Relations Act

Section 20040.5 of the California Franchise Relations Act voids out-of-state forum selection clauses in franchise agreements. However, a recent case shows that section 20040.5 can only defeat a forum selection clause where the existence of a franchise is properly alleged.

In Campbell v. FAF, Inc., 2019 WL 2574119 (S.D. Cal. June 20, 2019), the court considered the defendants’ motion to transfer the action to the Eastern District of Tennessee pursuant to what defendants contended was an enforceable forum selection clause. The plaintiffs’ claims were based on allegations that the defendants misclassified truck drivers as independent contractors rather than employees. Misclassification law can vary substantially between states.

To avoid enforcement of the forum selection clause, the plaintiffs claimed that Section 20040.5 applied. Interestingly enough, this put the plaintiffs in the position of alleging that they were both employees and franchisees. In response, the defendants argued that the contract for truck delivery services did not qualify as a franchise under California law.

The California Franchise Relations Act defines a “franchise” 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 the 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 that 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.

Cal. Bus. & Prof. Code § 20001; see also Cal. Corp. Code § 31005 (the court cited the California Franchise Investment Law’s similar definition).

The plaintiffs argued that determining whether they were a franchise was a mixed question of fact and law and thus should not be decided at the motion to dismiss stage. However, to accept such an argument would allow any party to allege a franchise relationship, regardless of whether such allegations were substantiated, and thereby avoid enforcement of a forum selection clause. The court did not agree with plaintiffs and held that it could decide on the basis of plaintiffs’ allegations whether section 20040.5 should apply.

Each Element of the Franchise Relationship Must Be Properly Alleged in the Complaint

Plaintiffs alleged the following facts in support of their argument that they were in a franchise relationship:

  • “In or around July of 2018, Defendants offered and sold Plaintiff the owner-operator opportunity.”
  • “Drivers make deliveries on behalf of Defendants.”
  • “Defendants prevent Drivers from engaging in business with anyone other than Defendants”.
  • “Defendants charged, and Plaintiff and the Class paid, direct fees for the right to purchase the owner-operator opportunity. Specifically, Plaintiff and Class members were required to purchase lease agreements and equipment for the trucks.”
  • “Defendants provided Plaintiff and Class members the owner-operator agreements under a marketing plan and/or system prescribed in substantial part by Defendants.”
  • “The purchase and operation of the owner-operator agreements was substantially associated with the trademarks, service marks, trade name, logotype, advertising, or other commercial symbols designated one or more of the Defendants.”

The court held that these allegations were not sufficient to support a plausible inference of a franchise. What led the court to this conclusion was that the allegations regarding two of the three elements, operating under a system and a trademark, simply seemed to recite the statutory elements, without any supporting facts.

The court cited to the U.S. Supreme Court’s decision in Twombly for the proposition that stating a claim for relief “requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). Further, the court followed a line of cases in California holding that truck delivery services do not constitute franchises. See Roberts v. C.R. England, Inc., 848 F.Supp.2d 1087 (N.D. Cal. 2012); Lads Trucking Company v. Sears, Roebuck, and Co., 666 F.Supp. 1418 (C.D. Cal. 1987). Those cases held that a franchise presupposes the establishment and cultivation of a business relationship between the franchisee and customers. This element was missing in the facts of each of those cases and here in Campbell.

The court also suggested that the burden might even be more than what is required under Twombly, which is showing nonconclusory facts to support a plausible inference of a franchise. Plaintiffs had to make a “‘strong showing’ that enforcement of the forum selection clause would contravene strong California public policy as to franchise law.” Here, they did not. Thus, the court did not apply section 20040.5 and granted the motion to transfer the case to the Eastern District of Tennessee.

The case is illustrative of the necessity of properly alleging a franchise relationship to obtain application of section 20040.5. A party must allege facts and not merely conclusions to show it falls within the definition of a franchise under California law. If there is evidence supporting the existence of a franchise relationship, it should be alleged in the complaint.

* Originally published in shorter form in the California Lawyers Association, Business Law Section, Franchise Law Committee, Case Report, July 2019

Work With an Experienced Franchise Lawyer

Having the right attorney can mean the difference between litigating in your chosen forum or having to fly halfway across the country to bring your case. If you need an experienced California franchise lawyer to analyze or litigate the issue of which forum you must litigate or draft related clauses, contact Luther Lanard, PC, to schedule a consultation.