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California Rules Forum Selection Clause in Limited License Agreement Enforceable

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LOS ANGELES - Last October, a district court in the Central District of California ruled that a forum selection clause in a limited license agreement between Burger King Corporation and a franchise in California is enforceable, despite the prohibition on out-of-state forum selection clauses under the California Franchise Relations Act (CFRA).

The Los Angeles law firm of Lewis Brisbois Bisgaard & Smith explained the Musavi v Burger King Corp. case in its Franchise Law Update. It stated that the court ruled that the limited license agreement was not a franchise agreement, even though it allowed the franchisees to continue to operate their franchises. And that the public policy behind the CFRA’s prohibition on mandatory litigation outside of the state was not advanced in this case. The franchisee was then required to litigate the lawsuit in Florida, as the limited license agreement stated.

Facts of the litigation

Attorney Leo Bautista laid out the facts of the case in his article, stating franchisees Syed Musavi and Shakeb Zuberi owned and operated the four Burger King franchises in California. In September of 2012, Burger King Corporation sent the store owners a notice of default alleging that they had breached material terms of their franchise agreements. On January 15, 2013, Burger King unilaterally terminated the franchise agreements due to unpaid rent, royalty, advertising, common area maintenance, and property tax charges. The franchisor then filed a lawsuit against the franchisees in the Southern District of Florida to enforce the termination.

That action was dismissed on the same day, when the franchisees entered into a limited license agreement with Burger King. That agreement provided that the franchise agreements were terminated, but that the franchisees were allowed to continue to operate the franchises until May 29, 2013 to allow them to sell the franchises.

The franchisees failed to sell or close the franchises by the deadline. On that date, the franchisees filed suit against Burger King in U.S. District Court for the Central District of California alleging that the limited license agreement was unconscionable and that Burger King had breached that agreement and the franchise agreements.

In response, on June 6, 2013 Burger King filed its own action against the franchisees in the Southern District of Florida claiming that the franchisees breached the limited license agreement. Burger King then brought a motion for transfer or dismissal in the California action, asserting that the case should be transferred to Florida pursuant to the forum selection clause in the limited license agreement.

The franchisees opposed that motion, arguing that the forum selection clause was unenforceable under the California Franchise Relations Act, which provides 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 franchised business operating within this state.” But the franchisees argued that enforcement of the forum selection clause would violate the public policy of California as embodied in the CFRA.

Court ruling

Addressing the issue, the California court determined that the forum selection clause in the limited license agreement was mandatory and required to be enforced unless it fell within one of the exemptions enumerated by the Supreme Court in Bremen v. Zapata Off-Shore Co

The district court acknowledged that in Jones v. GNC Franchising, Inc., the Ninth Circuit found a provision of the CFRA expresses the strong public policy of the State of California to protect California franchisees from the possible prejudice of litigating in a non-California venue. However, the district court also determined that the threshold issue was whether the limited license agreement constituted a franchise agreement, as defined by the California Franchise Relations Act.

Reviewing the facts and circumstances of how the LLA was entered into, the court determined that the LLA was not a franchise agreement but “can be best understood as an agreement terminating Plaintiffs’ [franchisees’] rights under the Franchise Agreements, rather than “granting” them rights.”

The court concluded that the forum selection clause was required to be enforced. Therefore, the district court ruled that, despite the CFRA’s bar on out-of-state forum selection clauses in franchise agreements, a similar clause in a subsequent agreement between a California franchisee and a franchisor is enforceable. Judge Dean D. Pregerson issued his decision on December 16, 2013.

Burger King Corporation was represented by DLA Piper in Los Angeles and Genovese Joblove and Battista in Miami, where the franchisor is headquartered.

Store owners’ counsel responds

Franchisee attorney Allan Claybon of mohajerian.com said he was confident his clients could have won on appeal because the judge who ruled on the case is just wrong. “Unfortunately, my franchisee clients ran out of funds to pursue the appeal,” he said.

The Los Angeles lawyer further explained that in what the franchisor called the  “settlement,” the franchisees’ license was extended for six months. Claybon asserted, “They pitched it as a settlement and part of it was to extend the license. You can’t operate a business without a license and it clearly said it was a license. But the judge made his decision and the appeal required more funding.” He added, “It’s unfortunate, but sometimes in these legal obligations franchisees do run out of money.”

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Article:

California Central District Court Rules in Favor of Forum Selection Clause in Limited License Agreement

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