Franchise Info: In California Venue and Choice of Law Provisions are not Enforceable

November 4, 2014

Starting your own business can be daunting. There can be a seemingly endless list of things you have to consider and decisions you have to make. One of those decisions is whether you are going to strike out with your own concept, or whether you are going to enter into a franchise agreement to become a part of a larger business that already has a proven track record. If you go the franchise route, you will have to sign a mostly binding franchise agreement–a sometimes long and sometimes quite complicated document that should be reviewed by an experienced lawyer. I say "mostly binding" because a California court held that one common part of these agreements is not enforceable in California.

The case in which the Court made this decision is Frango Grille USA Inc., v. Pepe's Franchising Ltd. Pepe's Franchising is a company from the United Kingdom that grants aspiring business people the right to operate and franchise Pepe's restaurant. Last year, Pepe's Franchising entered into such an agreement with Frango Grille which gave Frango Grille the right to operate Pepe's restaurants in California. Then, this year Frango sent a letter to Pepe's saying it wanted to end the agreement. Frango also sued Pepe's in Los Angeles, making allegations that had to do with breaches of franchise law.

The franchise agreement that both sides had signed included two provisions that, on their face, seem like they would make the Los Angeles suit impossible. First of all, the franchise agreement said that the venue for any lawsuits would be London, and second, that the law of the United Kingdom would apply to any disputes. So of course, Pepe's tried to have the lawsuit dismissed or moved to London. However, Frango countered that California's Franchise Relations Act (CFRA) trumped the relevant portion of the franchise agreement.

The portion of the CFRA that Frango relied on was Section 20040.5. It says 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 franchise business operating within the state."

Pepe's tried to get out of having this law applied to the case by arguing that the CFRA should only apply where the venue clause of a franchise agreement is unfair. However, the Court ruled that the statute covers all such venue restrictions. As for the choice of law provision, the Court held that California law would apply because, as Pepe's admitted, the relevant laws in both jurisdictions are actually the same.

This is excellent news for those of you who chose to start your business by becoming a franchisee. Even in the best of such relationships, disputes can arise between you and the franchisor. And while the franchisor is often a major multinational corporation, you as a small business person (1) likely would struggle to afford to litigate your dispute in a remote location and (2) would likely be completely unfamiliar with the workings of a legal system that, even in the case of the United Kingdom, is quite different from our own.