In 2013, Pepe's Franchising, a U.K. company, entered into a Master Franchise Agreement with Frango Grill, based in California, granting the right to operate and franchise Pepe's restaurants in California. The Agreement's venue clause required all disputes to be brought in London, where Pepe's was headquartered, and required U.K. law to apply.

In 2014, Frango sent a letter to Pepe's stating its intent to rescind the Master Franchise Agreement. Frango sued Pepe's in Los Angeles alleging franchise law claims. Pepe's moved to dismiss the action or move it to London pursuant to the Agreement's venue clause. Frango, citing California's Franchise Relations Act (CFRA), opposed Pepe's motion, claiming the California statute trumped the Agreement's venue requirements. Section 20040.5 of the CFRA states 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 this state.

Pepe's argued the CFRA should only apply when it would be unfair to apply the forum selection clause. The court ruled that the statute covers all venue restrictions, not just clauses imposed unfairly, and held that due to California's strong public policy, Section 20040.5 invalidated the agreed forum for resolving disputes. The court also held that California law would apply despite contrary provisions of the Master Franchise Agreement because Pepe's admitted that the laws of both jurisdictions were the same.

Furthermore, the court found that Pepe's sought to do business in California and registered its franchise disclosure document in California. Therefore, Pepe's should have contemplated that any franchisee dispute would be litigated in California.

When dealing with franchisees in multiple jurisdictions, a franchisor should not assume that its choice of law and forum agreement will be enforced. Review of the laws in jurisdictions where franchises are granted may be useful to assess risks related to the parties' selected forum and choice of law.

Franchisors should also consider the benefits of filing lawsuits preemptively against non-compliant franchisees in the jurisdiction stated in the franchise agreement to lessen the risk of litigating disputes in the franchisee's choice of forum.

To read about the case, click: Frango Grille USA Inc., v. Pepe's Franchising Ltd.