California Franchise Relations Act

Burger King Avoids The Venue Restrictions Of The California Franchise Relations Act: By Kevin A. Adams

By Kevin A. Adams on November 01, 2013

The U.S. District Court for the Central District of California, in the case of Musavi v. Burger King Corp.,[1] recently dismissed the franchisees’ lawsuit against Burger King – finding that the California Franchise Relations Act (the “CFRA”) did not bar the non-California forum selection clause in the parties’ contract.

On January 15, 2013, Burger King terminated its franchise agreements with plaintiffs – multi-unit operators since 2007 – for “unpaid rent, royalty, advertising, common area maintenance, and property tax charges.” The next day, the parties entered into a Limited License Agreement (the “LLA”), which confirmed Burger King’s termination of the franchise agreements, and allowed the plaintiffs to continue operating their stores for a limited time for the purpose of selling the franchises. The deadline set by the LLA was May 29, 2013, more than four months after the parties entered into the LLA.

As of the May 29, 2013 deadline, the plaintiffs had neither sold nor closed the restaurants. Instead, they filed a lawsuit against Burger King in the Central District of California for breach of the franchise agreements and the LLA. Burger King countered by filing a lawsuit of its own in the Southern District of Florida, and moving to dismiss the California action pursuant to a mandatory forum selection clause in the LLA – designating Florida as the exclusive forum for the parties’ dispute.

Plaintiffs attacked the forum selection clause in the LLA arguing that it contravened California’s public policy as reflected in the California Franchise Relations Act (the “CFRA”). In short, the CRFA invalidates forum selection provisions in franchise agreements that require California franchisees to resolve their disputes with the franchisor in non-California courts.[2]

The court rejected the plaintiffs’ argument after considering whether the LLA was a “franchise agreement” – and subject to the CFRA’s prohibition on out-of-state forum selection clauses. Under the CFRA (and the California Franchise Investment Law), a franchise is a contract or agreement, whether oral or written, by which:

  • (1) a franchisee is granted the right to engage in a marketing system substantially prescribed by the franchisor;
  • (2) the business is substantially associated with the franchisor's trademark or other commercial symbol; and
  • (3) the franchisee is required to pay, directly or indirectly, a franchise fee.[3]

Relying solely upon the first prong of the above definition, the court found that the LLA did not create a franchise relationship because it was “understood as an agreement terminating Plaintiffs’ rights under the Franchise Agreements, rather than ‘granting’ them rights.”[4] Because the relationship created by the LLA was not a “franchise,” the LLA was not subject to the venue restrictions of the CFRA. Thus, the forum selection clause within the LLA was enforceable and plaintiffs’ case was dismissed.

While the court’s rationale is sound, it could have just as easily found the LLA to have created a relationship between plaintiffs and Burger King that met all of the elements of a franchise. After all, Burger King had terminated the franchise agreements – ending the plaintiffs’ rights to use the Burger King system – before the parties entered into the LLA. Arguably, the parties’ entry into the LLA granted the plaintiffs new rights to operate their Burger King franchises sufficient to satisfy the first prong of the above test.

The only prong of the franchise test that may not have been satisfied by this case is number three – whether a franchise fee was paid. However, even if the plaintiffs did not pay any royalties under the LLA, their purchase of supplies from Burger King or Burger King’s vendors may have been sufficient to constitute a franchise fee.

Instead of addressing the elements of a franchise in more detail, the court focused on the “limited time period” of the LLA. However, the short four month term of the LLA – by itself – would not defeat the establishment of a franchise relationship between the parties.

It appears from the decision that the title of the document as an LLA – instead of a franchise agreement – weighed heavily in the court’s decision to find that the document did not create a franchise relationship.

[1] Musavi v. Burger King Corp., 2013 U.S. Dist. LEXIS 154467
[2] See Bus. & Prof. Code § 20040.5.
[3] Bus. & Prof. Code § 20001; Corp. Code, § 31005(a); see also Thueson v. U-Haul Internat., Inc., 144 Cal. App. 4th 664, 670 (Cal. App. 1st Dist. 2006).
[4] Musavi v. Burger King Corp., 2013 U.S. Dist. LEXIS 154467 at *8-9 (emphasis in original).






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