Alert - Musavi v. Burger King Corporation—Questioning the Enforceability of Out-Of-State Forum Selection Clauses in Franchise Agreements

April 22, 2014
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A recent decision from the United States District Court for the Central District of California has eroded further the strength of the California Franchise Relations Act (the “CFRA”) by providing franchisors with a potential avenue to avoid the CFRA’s prohibition concerning out-of-state forum selection clauses. 

 

In Musavi v. Burger King Corporation (2013 U.S. Dist. LEXIS 154467), the plaintiffs were the owners of four (4) Burger King franchises in California.  In January 2013, Burger King unilaterally terminated the franchises for a variety of alleged defaults and breaches.  Burger King and the plaintiffs then entered into a “Limited License Agreement” (the “LLA”) which provided the plaintiffs with the right to continue operating their franchises until May 29, 2013, so that they could shut-down, or attempt to sell, the franchises.  Plaintiffs were unable to do either, and on May 29th they filed a suit in California against Burger King alleging breach of the LLA.

 

Burger King countersued in Florida district court, based on the contention that the LLA contained a forum selection clause which required that any disputes be litigated in Florida courts.  Burger King then filed a motion in California to transfer the action from California to Florida.

 

The simple question before the Court was whether the LLA’s forum selection clause was enforceable.  The Musavi Court focused its analysis on the CFRA, specifically Business and Professions Code section 20040.5, which provides 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 involving a franchised business operating within this state.”  Traditionally, California courts have interpreted this provision to void out-of-state forum selection clauses, and force out-of-state franchisors to litigate their disputes with franchisees in California. 

 

The Musavi Court acknowledged the foregoing precedent, but nonethelessgranted Burger King’s motion to transfer.  The Court explained that the LLA was not a “franchise agreement” as defined in the CFRA.  Rather, the Musavi Court determined that the LLA was a form of “termination agreement,” which provided for the orderly winding down of plaintiffs’ business.  This was notwithstanding the fact that the LLA contained a variety of clauses which are not only standard in franchise agreements, but, in fact, identical to the plaintiffs’ pre-existing franchise agreement.

 

The decision in Musavi is important for franchisors and franchisees operating in California.  It provides a potential avenue for franchisors to avoid the CFRA’s prohibition on out-of-state forum selection clauses.  It may be possible to create agreements with franchisees which fall outside of the CFRA’s definition of “franchise agreements.”  Although it is difficult to predict whether a court will follow Musavi’s logic in the face of an agreement designed to fall outside of the CFRA, this decision is further evidence that California courts are whittling away at the CFRA’s traditionally pro-franchisee protections.  Examples of this are found in the recent cases of Maaco Franchising, Inv. v. Richard O. Tainter and Diane E. Tainter, where the Court provided an avenue to circumvent the CFRA when the franchisor preemptively files a lawsuit against a California franchisee in a foreign jurisdiction, and Atlantic Marine Construction Company v. United States District Court, in which the United States Supreme Court suggested that contractual forum selection clauses should be enforced unless “extraordinary circumstances” disfavor a transfer. 

 

Taken together, these cases suggest strongly that out-of-state franchisors who operate in California should draft franchise agreements specifically tailored to California’s unique laws.  Furthermore, out-of-state franchisors should anticipate challenges to their forum selection clauses and have a strategy in place to litigate forum-selection disputes with California franchisees. 

 

California franchisees, on the other hand, can no longer rely on courts to summarily prohibit the enforceability of out-of-state forum selection clauses.  Rather, franchisees should be more cognizant and vigilant than ever of the specific forum-selection language in their franchise agreements, and take steps to reduce the risk that these clauses avoid the applicability of the CFRA.