The Ninth Circuit ruled that a California Matco Tool franchisee, John Fleming, could bring a class action wage and hour suit in California, even though a forum selection clause in the distribution agreement specified Ohio law.

Fleming claimed he and other Matco franchisees were wrongly classified as independent contractors so Matco could evade California employment laws. The distribution agreement contained an arbitration clause and forum selection clause stating that all arbitrations would take place in Ohio. When sued in California, Matco claimed the agreement specified Ohio as the forum. The federal court in California found the arbitration clause was prohibited by the anti-waiver provision of the California Franchise Relations Act (CFRA), and therefore invalidated the Ohio forum clause. Matco sought appellate review.

The Ninth Circuit Court of Appeals rejected Matco’s appeal. The Ninth Circuit ruled the arbitration clause was null and void because it required an impermissible waiver of Fleming’s claims under the California Private Attorney General Act (PAGA). A clause in the agreement said any provisions found to be unlawful could be severed and the rest of the agreement would stay in effect. In view of the severability clause, the Ninth Circuit affirmed the lower court’s ruling to sever the unenforceable arbitration clause from the agreement. This allowed the CFRA anti-waiver provision to apply to the forum selection clause,and permitted Fleming’s claims to remain in California.

Manufacturers and franchisors contracting with distributors and franchisees in California must be aware of California’s employment and labor laws. The PAGA, for example, authorizes an employee to bring an action for civil penalties on behalf of the state against his or her employer for Labor Code violations, with most of the proceeds going to the state. Labor Code provisions can invalidate otherwise enforceable dispute resolution terms of an agreement. Contact California licensed franchise and distribution attorneys for advice on how these laws can impact your business.

In re Matco Tools Corporation, 9th Cir., ¶16,540