Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—C.D. Cal.: Termination without notice provisions in franchise agreements barred by California policy, (Jan 23, 2015)

By Edward L. Puzzo, J.D.

Provisions in a franchise agreement, mandating automatic termination without notice upon the failure to pay weekly franchise fees, was contrary to state policy and was not enforceable, the federal district court in Los Angeles has ruled (Fantastic Sams Salons Corp. v. Moassesfar, January 21, 2015, Wright, O.).

The Moassesfars were franchisees of two Fantastic Sams hair salons in California. The franchise agreement for the Tarzana location expired in February 2017; the agreement for the Northridge location expired in December 2019. Under their franchise agreements, the Moassesfars were obligated to pay a weekly franchise fee as long as they used the Fantastic Sams system or marks, whether authorized or not. The franchise agreement also stated that Fantastic Sams could terminate without notice if the franchisee’s bank refused to honor their bank draft for franchise fees.

The Moassesfars’ franchise fee checks to Fantastic Sams for the Tarzana and Northridge locations were dishonored on January 13, 2011 and February 19, 2012 respectively, and further payments were not forthcoming. Despite this, the Moassesfars continued to operate both locations as franchised Fantastic Sams locations until October 2014, when termination by stipulation was entered into in Fantastic Sams’ termination lawsuit. Since specific performance was no longer an issue, the remaining issues were Fantastic Sams’ claim for retroactive relief for breach of contract and trademark infringement.

One-year limitation. The Moassesfars alleged that Fantastic Sams’ claims were barred by a contractual limitations period in the franchise agreements. They argued that, pursuant to the agreements, the entire franchise agreements were automatically terminated when two consecutive payments were missed, and any claims arising out of the agreements had to be brought within one year. Since their payments ceased in January 2011 and February 2012 respectively, and Fantastic Sams did not file their termination lawsuits until August 2013, they reasoned, Fantastic Sams’ claims were barred.

The court responded that California law prohibited a franchise agreement from automatically terminating without notice to the franchisee and an opportunity to cure. The court therefore could not interpret the provision cited by the Moassesfars in such a manner. Therefore, termination did not occur in January 2011 and February 2012 as they allege, and their argument that Fantastic Sams’ claims were barred by a contractual limitations period failed.

However, the cited automatic termination provisions of the agreements were not rendered entirely meaningless. Since the Moassesfars continued to hold out their salons as Fantastic Sams franchises until October 2014, the franchisor was entitled to the monthly payments for the period starting with the date their complaint was filed on August 27, 2014 and ending with the October 2014 stipulated termination, the court ruled.

Acceleration. To the extent that Fantastic Sams sought fee payments beyond October 2014, through the remaining terms of the agreements in February 2017 and December 2019, the contractual limitations period barred such a recovery, the court ruled. That was because the contractual automatic termination provision triggered a clause accelerating all fee payments running through the expiration dates of the agreements. Since Fantastic Sams did not file their claim within one year, they were not entitled to accelerated payments of the franchise fees expected through the expiration dates of the agreements.

The case is Civil Action No. 2:14-cv-06727-ODW(PJWx).

Attorneys: Gregg A. Rubenstein (Nixon Peabody LLP) for Fantastic Sams Salon Corp. Brandon J. Witkow (Witkowlaw APLC) for Frank Moassesfar.

Companies: Fantastic Sams Salon Corp.

Cases: FranchisingDistribution CaliforniaNews