Franchise Registration Laws Can't Be Wielded By Nonresident Plaintiffs
By Douglas R. Luther on October 25, 2018
For one coffee chain, it was not about where they could go, but where they were. A New York federal court rejected a coffee chain’s efforts to seek the protection of the California Franchise Investment Law and other states’ franchise laws. In Keurig Green Mountain, Inc. v. Global Baristas U.S., LLC, No. 18-CV-0095 (LAK), 2018 WL 4926446 (S.D.N.Y. Oct. 10, 2018), the court granted Keurig’s motion to dismiss Global Baristas’ counterclaims which centered on the argument that Keurig had failed to comply with franchise laws across the country.
Keurig is a coffee company that markets “K-CUP” pods that are used with Keurig brewers. Keurig’s products are marketed and sold through distributors, retail sellers, anddirect channels. Keurig is a Delaware corporation and its principal place of business is in Vermont.
Global Baristas operated coffee shops and is incorporated and headquartered in Washington. On July 21, 2014 the parties entered into a trademark license agreement (the “Agreement”), granting Global Baristas an exclusive, non-transferable license to use the “TULLY’S” trademarks to sell coffee and retail products at licensed stores. Delaware law governed the Agreement. Global Baristas claimed that the Agreement was in fact a franchise agreement and that it had been sold a franchise.
Keurig brought a lawsuit against Global Baristas for breach of the Agreement based on Global Baristas (1) failing to pay annual royalty fees; and (2) using advertising material never approved by Keurig. Keurig alleged that it sent Global Baristas a formal notice of breach and demand for payment on October 27, 2017 and that Global Baristasfailed to cure the breach within thirty days, resulting in the automatic termination of the Agreement on December 1, 2017.
Global Baristas filed its counterclaims, centered on its contention that Keurig failed to register and disclose a franchise in violation of multiple state statutes: California, Hawaii, Michigan, North Dakota, Rhode Island and Virginia. However, Global Baristas did not operate in each of these states. Instead, Global Baristas contended that because it was granted the right to operate in each of the states, it was therefore entitled to the protection of their franchise laws. The parties did not dispute whether the Agreement was a franchise agreement but whether Keurig was required to comply with franchise disclosure laws in various states.
The court first reviewed California law. It cited Section 31110 of the California Business and Professions Code, which makes it “unlawful for any person to offer or sell any franchise in this state unless the offer of the franchise has been registered under this part or exempted under Chapter 1 (commencing with Section 31100) of this part.” Under Section 31013, an “offer or sale of a franchise is made in this state when an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state.” Global Baristas was domiciled in Washington, not California, and so any offer would have been directed to and accepted in Washington. Similarly, any offer for sale or sale would have originated from Delaware or Vermont, Keurig’s state of incorporation and principal place of business, not California. The court thus noted that Keurig did not make the offer from California and Global Baristas did not accept it in California.
This left the last prong, “if the franchisee is domiciled in this state, the franchised business is or will be operated in this state.” The court noted that even if Global Baristas was to operate a franchise in California at some point in the future that would not be enough, since it was not domiciled in California. The court thus held that Global Baristas has failed to state a claim under the CFIL.
Michigan, North Dakota and Rhode Island had the same statues as California in this regard and thus those claims were also subject to dismissal. Hawaii differed only in that it specifically exempted offers or sales where the franchisee is not domiciled in Hawaii and will not be operated in Hawaii. As Global Baristas was not domiciled in any of these states, each of these claims were subject to dismissal.
Virginia’s Retail Franchise Act was worded differently. It applies “only to a franchise the performance of which contemplates or requires the franchisee to establish or maintain a place of business within the Commonwealth of Virginia.” The Supreme Court of Virginia has interpreted this language as requiring a link to the State of Virginia, although a brick and mortar site is not necessary. The court held that the assertion that Global Baristas merely had a right to operate a franchise there (in addition to anywhere in the United States) did not satisfy this requirement.
The only franchise law that did arguably apply was the Washington Franchise Investment Act as Global Baristas was domiciled there. However, that Act did not have a specific statute of limitations. Rather than apply the 6-year statute of limitations for breach of contract or 3-year statute of limitations for fraud, the court held that the failure to register fell under the 2-year catchall statute of limitations. Thus, because the lawsuit was filed over three years later, it was time barred. However, the court did allow Global Baristas to keep an affirmative defense on similar grounds because it was not clear whether the statute of limitations would apply to affirmative defenses. And thus, Global Baristas was left with a glimmer of hope that franchise law might protect it.
Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.