Haynes and Boone, LLP client, How Do You Roll?, successfully enforced a venue selection clause against an area representative in the U.S. District Court for the Eastern District of California. As most franchise practitioners know, the California Franchise Relations Act prohibits a franchise agreement from restricting venue to a forum outside of California. More specifically, California Business and Professions Code Section 20040.5 states that 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 ….” The question facing the court in Estep, et al. v. HDYR, LLC, et al. (USDC East. Dist. Cal.) (2:14-cv-02418) was whether an area representative agreement would be encompassed within Section 20040.5 because any asserted breach of that agreement would “aris[e] under or relat[e] to a franchise agreement.”
This question arose out of a dispute between HDYR, LLC and the owners of an area servicer representative. Defendant HDYR developed a fast-casual, custom sushi restaurant in Austin, Texas called How Do You Roll? As the restaurant and its unique concept grew in popularity, How Do You Roll? expanded across Texas and into Arizona, Arkansas, Florida, and Illinois through the granting of franchises. Like most franchisors, HDYR enters into contractual agreements with area servicers who in turn solicit qualified prospective franchisees so that HDYR can grow its footprint to a desired number of restaurants in the area servicers’ specified geographic region. Notably, area servicers are not franchisees and the area servicers’ contracts are not franchise agreements.
Plaintiffs alleged that they entered into an Area Representative Servicer Agreement with HDYR in which Plaintiffs promised to solicit franchisees who would establish at least thirty How Do You Roll? restaurants in portions of Northern California in and around Solano County, California. The Area Representative Servicer Agreement required that if any litigation arose involving the parties, the exclusive venue would be Austin, Texas.
After disputes arose, plaintiffs filed their suit in state court (Northern California). HDYR removed the case to the federal district court. (Solano County Superior Court, Case No. FCS043717.) HDYR then filed a motion to transfer the litigation to Austin, Texas under the venue selection clause. Plaintiffs opposed that motion by asserting that the venue selection clause was void under Section 20040.5 because the purpose of an area servicer agreement is to recruit franchisees. Plaintiffs then argued that a forum selection clause against an area servicer would naturally be void because any dispute with an area servicer would “aris[e] under or relat[e] to a franchise agreement,” as that language is used in Section 20040.5.
The court agreed with HDYR and rejected plaintiffs’ opposition. The court concluded that the Area Representative Servicer Agreement was not a franchise agreement and, therefore, the California Franchise Relations Act did not apply to void the venue selection clause. The court also noted that California favors contractual forum selection clauses so long as they are entered into freely and voluntarily, and enforcement would not be unreasonable. (Citing Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1284 (9th Cir. 2006).)
Given the myriad types of contracts that could conceivably “aris[e] under or relat[e] to a franchise agreement,” the HDYR ruling helps reinforce the scope of California’s statutory prohibition on out-of-state venue selection clauses.