California franchisors and area representatives are free to choose which legal forum applies to their area representative agreements, according to the United States District Court for the Eastern District of California. While California’s franchise laws have a strong public policy in favor of adjudicating franchise agreement disputes in California courts, this same protection is not available for parties to area representatives agreements.
Mekaddishkem-EBE (“M-EBE”), an area representative, entered into an Area Representative Service Agreement with HDYR, LLC, a franchisor and operator of the Austin, Texas sushi restaurant, “How Do You Roll?” Under the agreement, M-EBE would establish at least thirty How Do You Roll? restaurants in Northern California. The agreement also stated that, in the event of a dispute, the parties would resolve their differences in the state or federal district courts located in Austin, Texas.
When M-EBE sued HDYR and its founder in California claiming breach of contract and fraud, HDYR requested the case to be transferred to the Western District of Texas pursuant to the forum selection clause. M-EBE argued that the litigation should remain in California. M-EBE reasoned that transferring the case to Texas would contravene the California Franchise Relations Act’s (“CFRA”) strong public policy against forum selection clauses in franchise agreements.
The District Court was unpersuaded. It first noted that forum selection clauses are generally presumed to be valid in the Ninth Circuit. It then reasoned that the CFRA was intended to protect California franchisees, who are “typically small business owners and entrepreneurs.” Estep v. Yuen Yung, No. 2:14-cv-02418-MCE-AC, at *3 (E.D. Cal. Jan. 13, 2015); Business Franchise Guide ¶ 15,452 (Jan. 13, 2015). The District Court declared:
“The Agreement is not a franchise agreement; it is a contract between a small company and a sophisticated area representative who would oversee the solicitation of 30 franchises.”
Id. The District Court transferred the case to the Texas federal courts, determining that the CFRA was “not on point” and insufficient to outweigh California’s policy favoring contractual forum selection clauses.
The District Court’s decision comes as good news for out-of-state franchisors who want to litigate on their home turf instead of in California. But it is also a cautionary tale for those hoping to apply California’s franchise protections outside the four corners of a franchise agreement. At least with respect to forum selection clauses, California courts are drawing a line in the sand between franchise agreements and area representative agreements.