Alert - Maaco Franchising, Inc. v. Painter

November 25, 2013
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Traditionally, California franchisees rely on California's Franchise Relations Act to protect them from franchisors invoking forum selection clauses to require that disputes be litigated outside of California. Specifically, California Business & Professions Code § 20040.5 provides that forum selection clauses in franchise agreements which restrict venue to a forum outside of California are unenforceable. A recent case in the Eastern District of Pennsylvania, Maaco Franchising, Inc. v. Richard O. Tainter and Diane E. Tainter (Case No. 12-5500, June 6, 2013), places into question the enforceability of the Franchise Relations Act and provides franchisors with the ability to circumvent California law and require that disputes involving California franchisees be litigated outside of California.

 

The California Franchise Relations Act provides a variety of protections to California franchisees, including a provision restricting forum selection clauses which require litigation between the franchisee and franchisor to be venued outside of California. This provision of the California Franchise Relations Act is decidedly pro-franchisee, in that it require disputes between California franchisees and out-of-state franchisors to be litigated in California courts.

 

In Maaco, a California franchisee was sued by the franchisor for the alleged non-payment of franchise fees, among other things. The franchisor filed the case in Pennsylvania district court, based on a forum selection clause in the franchise agreement which mandated that any disputes be litigated in Pennsylvania courts. The California franchisee argued that venue was improper in Pennsylvania, based largely on Business & Professions Code § 20040.5. The issue in the case was whether the forum selection clause was valid and enforceable in light of the California Franchise Relations Act.

 

In analyzing the issue, the Maaco Court applied the traditional standard for enforcement of a forum selection clause, namely: (1) whether enforcement of the forum selection clause is invalid for fraud or overreaching; (2) whether enforcement would contravene a strong public policy of the forum in which the suit is brought; or (3) whether enforcement would be "so gravely difficult and inconvenient as to be unreasonable and unjust and that it would deprive the party of its day in court." (Intermetals Corp v. Hanover Int'l Aktiengesellschaft Fur Industrieversicherungen, 188 F.Supp.2d 454, 458 (D.N.M. 2001), citing M/S Bremen v. Zapata Off-Shore Co., 407 U.S.1, 10 (1972)) The Maaco Court focused its inquiry on the second element, and explained that the question in Bremen was whether the strong public policy of Pennsylvania would be contravened by applying the subject forum selection clause. The Court explained that California's acknowledged strong public policy against having its franchisees be subject to out-of-state forum selection clauses was not relevant. The proper focus was on Pennsylvania's public policy. In looking to Pennsylvania public policy, the Maaco Court found no indication that the subject forum selection clause violated Pennsylvania public policy.

 

The takeaway from Maaco is that the provisions of the Franchise Relations Act may be circumvented by out-of-state franchisors who file suit in out-of-state forums against California franchisees. Such a rule may result in encouraging a "race to the Court" by California franchisees and out-of-state franchisors when litigation appears imminent. If the California franchisee is able to file first in California, and the franchisor moves to enforce a forum selection clause, the California Court is liable to conclude that California's "strong public policy" in Business & Professions Code § 20040.5 applies and negates the effect of the forum selection clause. In contrast, if the franchisor is able to file the lawsuit first in the out-of-state forum, that Court may well follow the reasoning of Maaco and conclude that California's public policy does not apply to the issue of the proper forum.

 

Franchisees and franchisors who operate in California should take heed of the Maaco decision, and be mindful that if a dispute appears imminent, the first to file may well end up determining the venue for the dispute.