Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—C.D. Cal.: Atlantic Marine analysis applies only to valid forum selection clauses, (Jul 22, 2014)

By Greg Hammond, J.D.

Pepe’s Franchising Ltd.—a franchisor of quick service restaurants featuring chicken food products—was unable to enforce a franchise agreement provision selecting London as the proper forum. In denying the franchisor’s motion to dismiss a franchisee’s action for forum non conveniens, the federal district court in Los Angeles distinguished the Supreme Court’s Atlantic Marine decision, finding that the requirement to analyze 28 USC sec. 1404 factors only applied to valid forum selection clauses (Frango Grille USA, Inc. v. Pepe’s Franchising Ltd., July 21, 2014, Fischer, D.).

Background. Pepe’s, a business incorporated and principally located in the United Kingdom, entered into a franchise agreement with Frango Grille USA, Inc., a California corporation. The agreement provided Frango with the right to open a Pepe’s-franchised restaurant and to recruit other California franchisees. In addition, the agreement contained a forum selection clause stating that “any proceedings arising out of or in connection with this Agreement shall be brought in any court of competent jurisdiction in London.” In February 2014, Frango sent a letter to Pepe’s, disclosing its intent to rescind the franchise agreement. Frango also filed suit in California, alleging various state law claims arising from the franchising agreement. Pepe’s moved to dismiss.

California Franchise Relations Act. In support of its motion to dismiss, Pepe’s argued that London is the only proper forum under the agreement’s forum selection clause. Conversely, Frango argued that the clause was invalidated by the California Franchise Relations Act (CFRA), 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 operation within this state.” In construing the CFRA broadly, pursuant to legislative intent, the court found that it applied to all franchise agreements that concern the operation of a franchise business within California, including those involved in the instant action.

Forum selection. Pepe’s additionally argued that even if the CFRA applied, it could not override the franchise agreement’s mandatory forum selection clause, as federal law governs the court’s decision. The court acknowledged that the Supreme Court’s decision in Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for W. Dist. of Texas makes it mandatory for federal courts to analyze 23 USC sec. 1404 factors in determining whether to enforce a forum selection clause. However, the court distinguished this rule, finding that it “applies only to valid forum selection clauses.” Because enforcement of the forum selection clause in this case would contravene a strong public policy of California, the clause was invalid and the Atlantic Marine analysis was inapplicable. Pepe’s motion to dismiss was therefore denied.

The case number is CV 14-2086 DSF (PLAx).

Attorneys: Max J. Sprecher for Frango Grille USA, Inc. Douglas R. Painter (Steinbrecher and Span LLP) and Eric L. Yaffe (Gray Plant Mooty Mooty and Bennett PA) for Pepe's Franchising Ltd.

Companies: Frango Grille USA Inc.; Pepe's Franchising Ltd.

Cases: FranchisingDistribution CaliforniaNews