California Courts Continue to Void Forum Selection Clauses in Franchise Agreements Under a Questionable Mutual Assent Theory

by Mulcahy LLP

The Ninth Circuit and California Court of Appeal generally continue to render forum selection clauses in franchise agreements unenforceable. This has been a hot topic among franchise litigators and on our blog. Forum selection clauses are an issue in California, in part, because the California Franchise Relations Act provides that forum selection clauses restricting venue to a forum outside the state are void for claims arising or relating to a franchise agreement.

Previously, we addressed (1) how California courts refuse to enforce forum selection clauses where a foreign court may be used to circumvent California statutory rights; (2) the applicability of the California Franchise Relations Act to voiding forum selection clauses in area representation agreements; and (3) the applicability of the California Franchise Relations Act to voiding forum selection clauses in licensing agreements.

California courts also apply a “mutual assent” theory to invalidate forum selection clauses in franchise agreements. Nygaard v. Property Damage Appraisers, Inc., 2017 WL 1128471 (E.D. Cal. Mar. 23, 2017), is the most recent decision to apply this theory and expounds upon it. In Nygaard, the court held that the forum selection clause and choice of law clauses were unenforceable because there was not mutual assent with respect to the affected terms. Thus, the court denied the franchisor’s bid to transfer venue to the Northern District of Texas.

The Nygaard court cited to both Laxmi Investments, LLC v. Golf USA, 193 F.3d 1095 (9th Cir. 1999) and Winter v. Window Fashions Professionals, Inc., 166 Cal. App. 4th 943 (2008) for support of its holding.

Laxmi involved a franchise agreement that specified an Oklahoma forum. The Ninth Circuit took up the case after the district court enforced the forum selection clause as being required by the Federal Arbitration Act (“FAA”). Rather than address the issue of whether the FAA preempted the California Franchise Relations Act’s forum selection statute, the Ninth Circuit analyzed whether there was a meeting of the minds on the forum selection provision. The franchisee in Laxmi had received a Uniform Franchise Operating Circular wherein it stated:

The Franchise Agreement also requires binding arbitration. The arbitration will occur in Oklahoma County, State of Oklahoma… This provision may not be enforceable under California law.

The franchise agreement signed by the franchisee contained no mention of California law or similar disclaimer. The Ninth Circuit held that the disclaimer in the Operating Circular meant that there was no meeting of the minds as to the Oklahoma County forum. According to the Ninth Circuit, it read the disclaimer to mean that the franchisor never indicated that it would insist upon an out-of-state forum despite the contravening California law (the California Franchise Relations Act).

The franchisor argued it had to include the disclaimer pursuant to California regulations. In response, the Ninth Circuit stated that if the franchisor believed that the California Franchise Relations Act was preempted by the FAA as to forum selection, it should have challenged the validity of the required language administratively or in court.

Nine years later, in Winter, the California Court of Appeals encountered a situation similar to Laxmi. The Uniform Franchise Offering Circular provided by the franchisor stated that the Texas arbitration and choice of law provisions “may not be enforceable under California law.” The Winter court followed Laxmi noting that the disclaimer supported the notion that there was no meeting of the minds as to the forum selection clause. Neither court went into any detail on why the disclaimer equated to there not being a meeting of the minds.

In Nygaard, the agreement’s mediation provision required mediation as a condition precedent to arbitration and named the franchisor’s corporate headquarters as the proper forum. The provision qualified that understanding by stating that “any provision selecting a forum outside California” may be void. Following Laxmi and Winter, the court held that there was no meeting of the minds as to selecting a forum outside of California for mediation.

Notably, the Nygaard court also questioned whether the California Franchise Relations Act, California Business and Professions Code Section 20040.5, might also invalidate the forum-selection clause. Other courts have held that section to be preempted by the FAA. See Bradley v. Harris Research, Inc., 275 F.3d 884, 890 (9th Cir. 2001). However, as noted by the Winter court, those courts often did not have the benefit of seeing the Uniform Franchise Offering Circular’s disclaimer.

The Nygaard decision shows that courts have continued to apply the Laxmi reasoning to find forum selection clauses unenforceable. Is that the right result? Does the disclaimer really mean that there was not mutual assent to the forum selection clause? The Laxmi court argued that the disclaimer meant that there was no evidence indicating that the franchisor would insist upon an out-of-state forum despite contravening California law. However, isn’t the fact that a franchisor has selected a forum outside of California and included the disclaimer evidence that it is insisting upon using an out-of-state forum despite contravening California law? There is additional evidence in that the franchise agreements themselves contained a forum selection clause without a disclaimer.

Furthermore, the Laxmi line of cases does not fully analyze whether there was a meeting of the minds by taking into account other mentions of the selected forum or choice of law within the disclosure documents or franchise agreement. This may, however, be a result of counsel not putting the evidence before the court. At least one court that did so found that a choice-of-law clause was enforceable despite the waiver. See Meadows v. Dickey's Barbecue Restaurants Inc., 144 F. Supp. 3d 1069, 1081 (N.D. Cal. 2015). In Meadows the court concluded that the “Franchise Disclosure Documents also include other provisions that make clear that Dickey's would insist on the application of Texas law” and therefore Texas law applies.

Other courts have distinguished the Laxmi line of cases by noting that the incorporation of a California law disclaimer does not render forum selection clauses void where the disclosure documents came after section 20040.5 was considered preempted by the FAA in Bradley. See Doctor's Assocs., Inc. v. Inder Pahwa & Satinder Pahwa, 2016 WL 7635748, at *13 (D. Conn. Nov. 3, 2016). Under this reasoning any statements in disclosure documents incorporating California state law after 2001 do not incorporate section 20040.5. Notably though, the Winter court did not follow this line of reasoning.

Courts in California are likely to continue to follow Laxmi and Winter in rendering forum selection clauses unenforceable. These California decisions put franchisors in a difficult position for purposes of enforcing forum selection and choice of law clauses. Under Cal. Code Regs. § 310.114.1(c)(5)(B) a franchisor is required to include such disclaimers with regard to choice of law and arbitration forum selection clauses that indicate forums and laws outside of California. Thus, the franchisor is required to set forth a disclaimer as to the enforceability of the forum selection or choice of law clause yet the disclaimer will likely invalidate the selected forum and/or choice of law.

The franchisor’s best strategy, if possible, is to file its’ case in the selected forum outside of California wherein a court is more likely to uphold the forum selection clause. See e.g. TGI Friday’s Inc. v. Great Nw Rests. Inc., 652 F.Supp.2d750, 760 (N.D. Tex. 2009); Maaco Franchising Inc. v. O. Tainter, 2013 WL 2475566 at *4 (E.D. Pa. 2013). If the franchisor needs to dispute the forum selection clause in California, the franchisor should provide evidence that the disclaimer came after Bradley (if applicable) and provide evidence to the Court of any other mention of the selected forum or choice of law throughout the franchise agreement or franchise disclosure document. In so doing, the franchisor may be able to show a meeting of the minds and enforce the forum selection clause.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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