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The California Court of Appeals recently ruled that a choice of law provision in a franchise agreement can displace California law governing franchise relationships.
by Gregg A. Rubenstein

A recent decision from the California Court of Appeals, 1-800-Got Junk? LLC v. Millennium Asset Recovery, Inc., has held that California’s Franchise Relationship Act (“CFRA”) can be superseded by a contractual choice of law provision, so long as the chosen jurisdiction provides greater franchisee protection than the California statute. Appeal No. B221636, 2010 Cal. App. LEXIS 1805 (Cal. App. Ct. 2d App. Dist. Oct. 21, 2010).

Franchise agreement’s choice of Washington law is enforceable.

In what the court acknowledged was an unusual situation, a California franchisee challenging its termination for failure to pay royalties sought to enforce its franchise agreement’s choice of law provision, while the franchisor sought to apply California law. The franchisor, based in Vancouver, Canada, chose Washington law to govern all disputes. At issue was whether the franchisee was entitled to notice and an opportunity to cure as required under Washington law or could be more quickly terminated in conformance with California law. Compare Cal. Bus. & Prof. Code § 20021 (a)-(k) (permitting summary termination for 11 distinct reasons, including failure to pay royalties within five days of notice) with Wash. Rev. Code § 19.100.180(j) (permitting summary termination for only four reasons and requiring 30 days notice to terminate for non-payment). As is common in many disclosure documents, the franchisor’s UFOC specifically stated that the Washington choice of law “may not be enforceable under California law.”

Unable to resolve the choice of law issue at summary judgment, the trial court held a “trial on declarations” to resolve the issue. The franchisee’s attorney submitted a declaration averring that:

In my experience most franchise agreements include a choice of law provision. . . . This is typically done so that the [f]ranchisor’s lawyers can become proficient in one state’s law and avoid having to learn the law of numerous other states. Choosing one state’s law to apply further creates consistency in the system and helps to ensure that franchisees operate under consistent rules.

In response, the franchisor submitted a declaration from its chief executive averring:

I have reviewed the wording of Section 12.12 of the Agreement . . . which states in part that the Agreement shall be “construed and interpreted according to Washington law.” I do not have an understanding as [to] why the Agreement states that it shall be construed and interpreted according to Washington law. [Got Junk] has never determined that Washington law provides better protection or is more beneficial to [Got Junk] or to any of its franchisees than the laws of any other state in which [Got Junk] operates.

(emphasis in original).

Weighing the evidence presented by both declarations, the trial judge found the franchisor’s evidence “not too useful” and held that the parties’ choice of Washington law was enforceable.

On appeal, the court applied a two-part test to determine if the choice of law was enforceable. First, the court analyzed whether the chosen law had a substantial relationship to either party or there was any reasonable basis for its choice. Although the court recognized that neither party had a substantial relationship to Washington, it relied upon cases from outside California to hold a franchisor’s choice of a single state’s law to govern all its franchise relationships reasonable.

Next, the appeals court analyzed the antiwaiver provision of the CFRA to determine if application of Washington’s law would contradict a fundamental California public policy. Cal. Bus. & Prof. Code § 20010 (“Any condition, stipulation[,] or provision purporting to bind any person to waive compliance with any provision of this law is contrary to public policy and void.”). Finding no case law on the issue, the court relied on case law interpreting the similar antiwaiver appearing in the California Franchise Investment Law (“CFIL”). Cal. Corp. Code § 31000 et seq. “By parity of reasoning, the CFRA at section 20010 like the CFIL . . . does not categorically prohibit choice of law provisions. . . . Therefore, the critical inquiry is whether enforcement of the Washington choice of law provision would diminish [the franchisee’s] rights under the CFRA.” Reaching what is likely not a surprising conclusion to those familiar with franchise litigation in California, the appeals court held that “the public policy of this state is not offended by a franchise agreement giving a franchisee superior protection from summary termination under the chosen law of another state.” (emphasis in original).

Based on the court of appeal’s decision, franchisors should carefully review their franchise agreements to determine if they have chosen a particular state’s law to govern and whether the chosen state is the standard by which it wants all relationships governed. In California, conformance with its statutory laws is no longer sufficient if a franchisor has selected a more protective state’s law to govern. Accordingly, before any adverse action may be taken against a California franchisee, systems must ensure that it is in accord with the relevant franchise agreement, California law, and the law of the franchisor’s chosen jurisdiction.

Nixon Peabody Franchise Law Alert, Nov 2, 2010.
Reprinted with permission.

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Gregg Rubenstein, Partner
Gregg Rubenstein is a member of the firm’s Intellectual Property group. He focuses his practice in the areas of franchise and distribution litigation, complex commercial litigation, and trade secret matters. Mr. Rubenstein also has experience with and represents clients in a variety of labor and employment matters, including arbitration proceedings and defense of wrongful termination and employment discrimination claims before federal and state courts

Nixon Peabody LLP is recognized as a “Global 100” law firm - one of the largest in the world. With 800 attorneys collaborating across major practice areas in 17 cities, including Boston, Chicago, London, Los Angeles, New York, Paris, Rochester, San Francisco, Shanghai, Silicon Valley, and Washington, DC, the firm’s size, diversity, and advanced technological resources enable it to offer comprehensive legal services to individuals and organizations of all sizes in local, state, national, and international matters.


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