By: Thomas M. O’Connell
August 31, 2020
Citation:
Brown v. DetailXPerts Franchise Systems, LLC, Not Reported in Fed. Supp., 2020 WL 5106842 (N.D. Cal. 2020)
Executive Summary:
In this unpublished decision, Magistrate Judge Susan Van Keulen, of the United States District Court for the Northern District of California, denied motions by DetailXPerts Franchise Systems, LLC, to dismiss the Second Amended Complaint (SAC) under Federal Rule of Civil Procedure 12(b)(6) and to transfer venue to the Eastern District of Michigan under 28 U.S.C. § 1404(a). The case centered on whether the arbitration and forum selection clauses in a franchise agreement were enforceable under California law. The court found disputed facts regarding procedural unconscionability, precluding dismissal based on the arbitration clause. Additionally, the court invalidated the forum selection clause under the California Franchise Relations Act (CFRA), emphasizing the state’s strong public policy protecting franchisees.
Relevant Background:
Plaintiffs Michael Brown and Bobcat 1 Enterprises, Inc. entered into a Franchise Agreement with Defendant DetailXPerts Franchise Systems, LLC to operate a vehicle detailing franchise in California. The agreement included an arbitration clause and a forum selection provision designating Michigan courts for dispute resolution.
After some time, Plaintiffs halted franchise operations, citing fraudulent misrepresentations by Defendant during contract negotiations, and filed a lawsuit seeking declaratory relief and asserting claims under the California Franchise Investment Law (CFIL), California Business & Professions Code § 17200, and others.
Defendant initially moved to compel arbitration, which the court granted in 2018, staying the case. However, Plaintiffs did not initiate arbitration and later filed an amended complaint challenging the arbitration clause’s validity. Defendant subsequently moved to dismiss the SAC and transfer the case to Michigan.
Hence, this dispute centered on whether the forum selection and arbitration provisions were enforceable under California law, particularly in light of the state’s strong public policy protecting franchisees and its regulatory framework governing franchise agreements.
Decision:
The court denied Defendant’s motion to dismiss and transfer venue based on the following:
- The court rejected Defendant’s argument that the arbitration clause in the Franchise Agreement required dismissal of the SAC. Although the agreement contained an arbitration clause, Plaintiffs challenged its enforceability, claiming it was unconscionable.
- Under California law, both procedural and substantive unconscionability must be established to invalidate an agreement. The court identified disputed facts such as whether the agreement was presented on a “take it or leave it” basis that prevented a conclusive ruling on procedural unconscionability. Since procedural unconscionability could not be determined, the court also declined to assess substantive unconscionability at this stage, thereby denying the motion to dismiss.
- The court invalidated the forum selection clause under California’s Franchise Relations Act (CFRA), which prohibits requiring franchisees to litigate outside California. The court emphasized the state’s strong public policy favoring local forums for franchisees.
- Evaluating other convenience factors under 28 U.S.C. § 1404(a), the court found that California was a more appropriate venue given the location of the franchise and Plaintiff’s choice of forum. Although Defendant argued for Michigan based on governing law and potential cost savings, these factors were insufficient to override California’s policy protections.
The court also outlined procedural steps for scheduling and discovery, focusing on efficiency in moving the case to trial.
Looking Forward:
This case provides several important considerations for franchisors, franchisees, and other stakeholders involved in franchise agreements:
- This case reaffirms that franchisors should be cautious when including forum selection clauses in agreements with California-based franchisees. California’s Franchise Relations Act (CFRA) will invalidate provisions requiring litigation outside the state, so franchisors should carefully consider how these clauses might be challenged.
- Also, while arbitration clauses are generally enforceable, they must withstand scrutiny for both procedural and substantive fairness. Franchisors should ensure that these clauses are not perceived as coercive or lacking proper negotiation during the contract’s execution.
- This case highlights California’s strong public policy providing significant protections for local franchisees, including a preference for local forums and stringent requirements for agreements affecting franchise relationships. Franchisors should be mindful of these protections when drafting their agreements.
- Finally, this case presents the importance of franchisees presenting detailed evidence of unconscionability or public policy violations when challenging contractual provisions. Thus, franchisors must ensure that their agreements comply with the laws of the states where their franchises operate to avoid costly litigation.