A California federal court denied a franchisor’s motion to dismiss a franchisee’s complaint claiming the franchisee failed to first mediate the dispute before filing an action as required under the franchise agreement.
The franchisee purchased a lawn care and landscaping franchise. Prior to the purchase, the franchisee had discussions with executives and representatives of the franchisor to develop the business in Central California. The franchisee was led to believe that the franchisor never had a presence in California and that the first franchisee in California joined the system a few months earlier. After the franchisee could not generate a profit, the franchisee filed suit against the franchisor, asserting claims for fraud and deceptive business practices based on the franchisor’s alleged material misrepresentations and omission in the offer and sale of the franchise.
The franchisor moved to dismiss the complaint, arguing, in part, that the franchise agreement required the franchisee to mediate the dispute prior to filing the action in federal court, which the franchisee had not done. The franchisor contended that dismissal was proper under Texas law based on a choice of law provision that stated the agreement is governed by Texas law and a requirement that mediation take place in Texas before initiating a lawsuit.
The federal court denied the franchisor’s motion. The court found that the choice of law provision cannot govern the franchise agreement to the extent it undermines the California Franchise Relations Act (“CFRA”). The court found that the requirement for mediation in Texas obstructed California franchisees from California courts.
Prelitigation mediation requirements may conflict with applicable state franchise laws and a franchisee’s right to have their case litigated in the franchisee’s home state. A provision that negates a franchisee’s right to recover attorney fees as a prevailing party for failing to undertake required mediation, might have averted the lawsuit brought in this case. Franchisors should consult franchise counsel to review provisions covering alternative dispute resolution.
Argus Capital v. Allison, No. 1:23-cv-00043 JLT, 2025 U.S. Dist. LEXIS 68192 (E.D. Cal. Apr. 9, 2025)
