December 7, 2023
By: Thomas O’Connell
Citation:
Absolute USA, Inc. v. Harman Professional, Inc., 2023 WL 11944440 (C.D. Cal. 2023).
Executive Summary:
In this unpublished decision, Judge Maame Ewusi-Mensah Frimpong of the United States District Court for the Central District of California denied the defendants’ motion to dismiss and granted the plaintiffs’ request for judicial notice. The plaintiffs, Absolute USA, Inc. and its owner, alleged violations under the California Franchise Relations Act (CFRA) and breach of the implied covenant of good faith and fair dealing. The court found that the plaintiffs adequately pled their claims and rejected the defendants’ arguments to dismiss on several grounds.
Relevant Background:
Absolute USA, Inc., led by its sole owner Mohammad Razipour, entered into a Dealer Agreement with Harman Professional, Inc. in 2015. The agreement authorized Absolute to sell Harman’s products online on a non-exclusive basis. It included automatic renewal provisions and allowed termination under certain conditions, such as breach or advanced notice.
The plaintiffs alleged that Harman improperly terminated the agreement without notice in March 2020. They further contended that Harman’s practices constituted a franchisor-franchisee relationship under the CFRA. The plaintiffs argued that Harman required payments that qualified as franchise fees, such as set-up fees, marketing fees, and training fees, which allowed Absolute to sell and advertise Harman products. Harman, however, maintained that the agreement explicitly disclaimed a franchise relationship and that no franchise fees were charged.
Procedurally, the case saw multiple amended complaints and motions to dismiss. The plaintiffs’ claims for breach of implied covenant of good faith and fair dealing and violation of the CFRA were central to the current motion.
Decision:
The court ruled as follows:
- The court found that the plaintiffs adequately pled a franchise relationship under the CFRA, as they alleged payments fitting the statutory definition of franchise fees. Despite the agreement’s disclaimer, the court concluded that its language was not dispositive in determining a franchise relationship.
- The court ruled that the plaintiffs’ claim was distinct from their breach of contract claim. The plaintiffs alleged that Harman unfairly exercised its discretion under the agreement, including rejecting orders without justification, which supported a separate claim for breach of good faith.
- The court declined to dismiss the claims based on procedural or substantive arguments raised by the defendants, emphasizing that the plaintiffs met the pleading standard for these causes of action.
Looking Forward:
This case underscores critical considerations for businesses entering into dealership or distributorship agreements:
- Agreements involving fees for training, marketing, or other services may risk classification as franchise relationships, even if explicitly disclaimed in the contract. Businesses should structure agreements with care to avoid unintended franchise implications under statutes like the CFRA.
- Contracting parties must exercise their contractual discretion fairly and in good faith. Courts may imply good faith limits to prevent abuse, even where contracts grant absolute discretion.
- Payments required under distributorship agreements should be assessed to determine whether they qualify as franchise fees. Businesses must maintain transparency and proper documentation to defend against such claims.