Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Cal.: Policy against forum selection outside California did not apply to area representative, (Jan 15, 2015)

By Dan Selcke, J.D.

A forum selection clause contained in an area representative agreement was valid and enforceable, a federal district court in California held, rejecting the area representative’s argument that enforcing it would violate a California public policy against enforcement of such clauses in franchise agreements. That policy, which was embodied in the California Franchise Relations Act (CFRA), did not apply in this situation, since the agreement was between a franchisor and an area representative, rather than between a franchisor and a franchisee (Estep v. Yung, January 13, 2015, England, and M.).

Forum selection clause. HDYR operated a fast-casual sushi restaurant in Austin, Texas called “How Do You Roll?” In an effort to expand its business, HDYR entered into an area representative agreement with Mekaddishkem-EBE, a company owned by David and Deanna Estep. Under that agreement, Mekaddishkem was to solicit franchisees who would establish at least 30 How Do You Roll? restaurants in northern California. The agreement also contained a forum selection clause providing that the parties would resolve any legal disputes through the state and federal district courts located in Austin, Texas. The Esteps signed the agreement on behalf of their company, and personally guaranteed that Mekaddishkem would fulfill its obligations under the agreement.

Eventually, the Esteps brought claims for fraud and breach of conflict against HDYR. They filed their suit in California, and HDYR filed a motion to transfer the case to the Western District of Texas pursuant to the forum selection clause.

Ninth Circuit rules. In the Ninth Circuit, a forum selection clause was generally considered valid and only held to be unenforceable if it was the result of fraud, undue influence, or overwhelming bargaining power; if the selected forum was so inconvenient that forcing plaintiffs to litigate there would essentially deny them their day in court; or if enforcement would contravene a strong public policy of the forum where the suit was brought. In this case, there was no evidence that the Esteps were forced to sign the agreement or that it would be overly difficult for them to litigate in Texas.

Applicability of CFRA. In response to the motion to transfer, the Esteps pointed to the CFRA, which represented a strong public policy against enforcing forum selection clauses in franchise agreements. According to the court, this argument had no force here, since the agreement between HDYR and Mekaddishkem was not a franchise agreement. Franchise agreements were made between franchisors—like HDYR—and individual franchisees, which were typically small business owners and entrepreneurs. Mekaddishkem was retained to find franchisees, but was not a franchisee itself. It was a small but sophisticated company, and not the sort of entity the CFRA was designed to protect. Therefore, any public policy embodied by the CFRA offered it no protection from the general assumption that forum selection clauses were enforceable.

Contract parties. The court also rejected the Esteps’ arguments that, while their company was a party to the agreement, they themselves were not, and therefore were not bound by its terms. The argument failed for multiple reasons. First, the Esteps signed a personal guaranty that was attached to the agreement. Also, even if the Esteps were not parties to the agreement, Ninth Circuit case law allowed non-parties to be held to forum selection clauses if their conduct was closely related to the contractual relationship at issue. Here, the Esteps’ complaint was based entirely on the contractual relationship between HDYR and Mekaddishkem. The Esteps could not be allowed to sue for breach of contract only to turn around and argue that they were not parties to that contract just to avoid one of its provisions. Accordingly, the court granted HDYR’s motion to transfer.

The case number is: 2:14-cv-02418-MCE-AC

Attorneys: Vincent M. Spohn (Law Offices of Vincent M. Spohn, APC) for David Estep. William C. O'Neill (Haynes And Boone, LLP) for Yuen Yung, and Hdyr, LLC.

Companies: HDYR, LLC

Cases: FranchisingDistribution CaliforniaNews