March 31, 2023
By: Thomas O’Connell
Citation:
Singh v. Wireless Vision, LLC, 2023 WL 2752584 (E.D. Cal. Mar. 31, 2023).
Executive Summary:
In this unreported decision, Magistrate Judge Jeremy D. Peterson of the United States District Court for the Eastern District of California denied defendants’ motion to transfer venue and plaintiffs’ motion to strike. The case arose from plaintiffs’ allegations of breach of contract and violations of the California Franchise Relations Act (CFRA) against defendants Wireless Vision, LLC, and Ameritel Management, Inc. The court found that the Operator Agreement constituted a franchise agreement under the CFRA and rendered the forum-selection clause void under California law.
Relevant Background:
Paul Singh, the sole owner of 1-Mobile Operators of California, LLC, entered into an Operator Agreement with Ameritel Management, Inc. in 2017. Under the agreement, Singh invested over $160,000 to establish a retail store selling T-Mobile products in California. Singh claimed that the agreement required him to follow Ameritel’s marketing guidelines, use branded materials, and make certain payments, including a $10,000 deposit, which he alleged constituted a franchise fee as defined by California law.
In 2021, Ameritel assigned its interests under the agreement to Wireless Vision, LLC, which subsequently terminated the agreement in April 2022 without providing a reason. Singh alleged that this termination led to his eviction from the store and the loss of its contents. Defendants removed the case to federal court and filed a motion to transfer venue based on a forum-selection clause in the agreement requiring disputes to be litigated in New York.
Decision:
- The court found that California Business and Professions Code § 20040.5, which states, “A provision in a franchise agreement restricting venue to a forum outside this state is void with respect to any claim arising under or relating to a franchise agreement involving a franchise business operating within this state,” rendered the forum-selection clause unenforceable.
- The court found that the Operator Agreement met the definition of a franchise under California Business and Professions Code § 20001, as Singh was required to operate under Ameritel’s marketing plan and the T-Mobile brand. Additionally, Singh’s $10,000 deposit and over $36,000 spent on fixtures and signage were deemed franchise fees under California Business and Professions Code § 20007, as they were mandatory and directly tied to Singh’s ability to operate the business.
- The court rejected the defendants’ argument that the Operator Agreement’s disclaimer of a franchise relationship was dispositive. Citing Gabana Gulf Distribution, Ltd. v. Gap Int’l Sales, Inc., the court held that the substantive terms of the agreement and Singh’s unrecoverable investments outweighed such disclaimers.
- The court distinguished the case from Thueson v. U-Haul Int’l Inc., where payments were considered ordinary business expenses. The court found that Singh’s significant investments, including fixtures and improvements, far exceeded regular business costs and were essential to the operation of the franchise. This aligned with the precedent set in Boat & Motor Mart v. Sea Ray Boats, Inc., where required purchases were deemed franchise fees.
- The court applied the traditional factors under 28 U.S.C. § 1404(a) and found that the claims arose in California, involved California law, and supported deference to the plaintiffs’ choice of forum. The defendants’ reliance on the forum-selection clause was insufficient to justify transfer.
Looking Forward:
This case highlights key lessons for franchisors operating in California and other jurisdictions with strong franchisee protections. While the court ruled against the franchisors, the decision provides guidance on how franchisors can avoid similar outcomes in future disputes:
- Franchisors should carefully evaluate their agreements to ensure compliance with franchise laws, particularly in jurisdictions like California where statutory protections are strong. If a forum-selection clause is essential, alternative mechanisms such as arbitration clauses tailored to local laws may provide a middle ground.
- Payments required from franchisees, including deposits, build-out costs, and fixture purchases, should be clearly delineated in agreements. Proper classification of fees can help avoid them being deemed franchise fees under laws like California Business and Professions Code § 20007.
- To reduce the risk of unintended franchise classification, franchisors should balance the need for brand consistency with granting franchisees operational independence. Agreements that impose comprehensive marketing plans and strict operational guidelines are more likely to meet franchise definitions.
- In litigation, franchisors should focus on distinguishing their agreements from franchise classifications by emphasizing business independence and rebutting claims of mandatory fees tied to the right to operate. Ensuring agreements include provisions demonstrating independence may mitigate risks.