The United States District Court for the Eastern District of California recently upheld a forum selection clause in favor of a franchisor and transferred the case to the United States District Court for the Western District of Texas.
In Estep, et al. v. Yung, et al.,1 Mekaddishkem-EBE, Inc. (M-EBE) and its owners (collectively, the plaintiffs) sued HDYR, LLC and its owner (collectively, the defendants) for breach of contract and fraud in the California court. HDYR operated a fast-casual sushi restaurant in Austin, Texas and sought to franchise the concept under the name How Do You Roll? HDYR had entered into an area representative service agreement with the plaintiffs under which the plaintiffs were to solicit franchisees to establish a number of How Do You Roll? restaurants in Northern California.2 The agreement contained a forum selection clause providing that exclusive venue for disputes between HDYR and the plaintiffs would be the state or federal district courts located in Austin, and each party had waived any objection it had to the personal jurisdiction of or venue in such courts. The defendants filed a motion to transfer the case to the Texas court, as mandated by the forum selection clause. The California court granted the defendants’ motion to transfer.
The California court stated that forum selection clauses are presumptively valid in the Ninth Circuit and are only unenforceable if (1) the clause was the result of fraud, undue influence, or overweening bargaining power; (2) the selected forum is so gravely difficult and inconvenient that the party against whom the clause was asserted would essentially be denied their day in court; or (3) enforcement of the clause would contravene a strong public policy of the forum in which the suit was brought. Having found no evidence that the plaintiffs were coerced into signing the agreement or that it would be gravely difficult for them to litigate the action in Texas, the California court addressed whether the agreement’s forum selection clause was unenforceable because of public policy concerns.
The plaintiffs argued that the California Franchise Relations Act, which prevents the enforcement of forum selection clauses in franchise agreements, evidenced a strong public policy that would be contravened if the plaintiffs’ case were not adjudicated in California. The California court found the plaintiffs’ argument unpersuasive, reasoning that the California Franchise Relations Act was inapposite because the agreement was not a franchise agreement but a “contract between a small company and a sophisticated area representative who would oversee the solicitation of 30 franchisees.” Thus, the California court found that the California Franchise Relations Act was not enough to outweigh California’s policy of favoring contractual forum selection clauses.
Moreover, the California court was not persuaded by the plaintiffs’ argument that the forum selection clause was unenforceable as to M-EBE’s owners because they were not a party to the agreement. The California court reasoned that the owners, as individuals, signed a personal guaranty that was attached to the agreement. Additionally, the forum selection clause was broad enough to encompass the action for breach of contract and fraud since it was a matter involving both M-EBE and HDYR (as both companies were sued by the plaintiffs). Finally, the California court noted that Ninth Circuit case law allows non-parties to be held to forum selection clauses if the conduct of the non-parties is closely related to the contractual relationship. In this case, the plaintiffs’ action was based on the contractual relationship between HDYR and M-EBE. The California court opined that the plaintiffs could not sue for breach of contract and then, in an effort to avoid a contractual provision, argue that they were not parties to the contract.
Because the California court found the forum selection clause enforceable, the case was transferred to the Texas court for further proceedings.3
Although many earlier California decisions appear to reflect a bias favoring franchisees, the California court in this case took a very common-sense approach. In light of this case, franchisors, including those with franchisees in California, are well advised to continue to include well-conceived and well-drafted forum selection clauses in their franchise agreements.