May 3, 2019
By: Thomas M. O’Connell
Fleming v. Matco Tools Corporation, et al. 384 F.Supp.3d 1124 (Cal.N.D. 2019).
In a reported decision, Judge Orrick of the United States District Court for the Northern District of California denied Matco’s motion to transfer. While Matco’s forum selection clause selecting arbitration to occur outside of California was clear and unambiguous on its face and the Court found that the Federal Arbitration Act may preempt California statute requiring franchise litigation concerning California franchisees to be heard in the State of California, ultimately, the Court found that Matco’s pre-dispute waiver of PAGA claims and a non-severability clause combined to invalidate Matco’s arbitration provision.
Matco Tools Corporation (“Matco” or “Defendant”) manufactures and distributes mechanic’s tools and service equipment and relies on distributors to make sales and service calls to existing and prospective customers through mobile distributorship stores. John Flemming (“Plaintiff”) was a distributor from July 2012 to December 2018. Plaintiff filed suit against Defendant arguing that Defendant had been misclassifying him and other similarly situated distributors as independent contractors as opposed to employees. Defendant moved to dismiss or transfer the case pursuant to a forum selection clause in an agreement between it and Plaintiff.
The Court denied the motion to dismiss or transfer. The rationale of the Court was as follows:
- California Business and Professions Code s. 20040.5 makes void any “provision in a franchise agreement restricting venue to a forum outside this state … with respect to any claim arising under or relating to a franchise agreement involving a franchise business operating within this state.”
- Defendant’s argued that it has a valid arbitration provision and, as such, the Federal Arbitration Act preempts Section 20040.5 pursuant to Bradley v. Harris Research, Inc. 275 F.3d 884, 890 (9th Cir. 2001) and Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681 (1996). While the Court accepted the premise of Defendant’s argument, it found it must make a threshold finding of whether the arbitration provision is valid.
- In making that threshold finding, the Court analyzed the totality of the Distribution Agreement. Therein, the Court found that a pre-dispute agreement to waive PAGA claims was unenforceable pursuant to California Civil Code ss. 1668 and 3513. The Court also identified a provision of the arbitration agreement which provides “if the provision prohibiting classwide or private attorney general arbitration is deemed invalid, then the provision requiring arbitration of breaches between the parties shall be null and void and there shall be no obligation to arbitrate such breaches.” Taking the impermissible PAGA waiver together with the non-severability provision, the Court found that neither party has an obligation to arbitrate the claims.
While the Court considered several other arguments by Defendant–such as that the Dormant Commerce Clause of the United States Constitution invalidates Section 20040.5 or that public and private factors under 28 U.S.C. s. 1404(a) weighs in favor of a transfer–these arguments were each soundly rejected by the Court.
While this case is sure to be of some interest to the franchise community following the Dynamax decision and in the midst of AB5 and the argument related to the Dormant Commerce Clause raises interesting academic questions, there are two critical lessons that the Court’s decision makes clear:
- While California Business and Professions Code s. 20040.5 may void provisions in franchise agreements requiring litigation in forums outside of the State of California for franchise businesses operating within the State, the Court would have granted Defendant’s Motion to Transfer had the arbitration agreement been valid.
- Conversely, for those franchisors who seek to take advantage of the FAA’s preemption of Section 20040.5, it is critical that the arbitration agreement and all other litigation related sections do not run afoul of California law and result in the invalidation of the arbitration agreement.
As stated numerous times in cases such as this, California Court’s believe “the franchisee is better protected by California laws” and “[a] forum selection clause ‘that requires a California franchisee to resolve claims related to the franchise agreement in a non-California court[,]” such as the one here, ‘directly contravenes [the] strong public policy” as expressed through Section 20040.5. This matter provides insight into the two paths the Court may take on forum selection clauses and franchisors should consider modifying their franchise agreements accordingly.
This article was originally published on the California Franchise Network.