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Franchise Agreement Choice of Law

Franchise Agreements are notorious for containing “choice of law” provisions that favor franchisors in a distinctly one-sided fashion. However, a franchisor manitaining strict control over the workings of its franchise agreement does not always guaranty a favorable result. Consider the following:

A classic case of “be careful what you ask for” …

The case 1-800-Got Junk? LLC v. Superior Court, 189 Cal. App. 4th 500, 504, 116 Cal. Rptr. 3d 923, 925 (Cal. Ct. App. 2010), review denied (Jan. 12, 2011), as modified (Nov. 19, 2010), reh’g denied (Nov. 5, 2010), presented the unusual situation where a franchisee sought to enforce the choice of law provision in its franchise agreement, while the franchisor argued against application of the terms of its own contract!

Here, the franchisee brought suit against its franchisor, 1-800-GotJunk? (a junk removal franchise business headquartered in Vancouver, British Columbia, Canada) for wrongfully terminating its franchise to operate a Got Junk franchise in various territories in the Los Angeles area without the opportunity to cure its default. The franchise agreement specified the application of the law of Washington State, which the franchisee sought to enforce due to the fact that Washington State provided it with certain protections relative to its dispute. Specifically, the Washington Franchise Investment Protection Act restricted the franchisor to four situations in which it could summarily terminate a franchise without providing notice and an opportunity to cure (and none of those four situations existed in the case). The franchisee argued that in the interest of franchise uniformity, the franchise agreement properly designated Washington law to apply to the franchise agreement.

The franchisor opposed the franchisee’s position, instead seeking to apply the law of California to the franchise agreement. In contrast to Washington, the California statutory scheme provides for immediate termination without opportunity to cure in the same four situations as well as numerous others. The franchisor contended that the choice of law provision in its franchise agreement was unenforceable because there is no reasonable basis for the application of Washington law, and disclaimed any knowledge of why its form franchise agreement included the choice of law provision.

The trial court held that Washington law applied to the action. The California Court of Appeal thereafter affirmed the decision of the trial court, finding that the trial court properly gave credence to the choice of law provision in the franchise agreement. It held that because a multi-state franchisor has an interest in having its franchise agreements governed by a uniform body of law, the franchisor had a reasonable basis for inserting a choice of law provision in the franchise agreement. As for the designation of Washington law in particular, given that state’s proximity to the franchisor’s headquarters in Vancouver, Canada, there was a reasonable basis for the parties’ choice of law. Further, notwithstanding the CFRA, an extensive California statutory scheme governing franchise relations, the franchisor and franchisee were free to agree that their relations would be governed by another body of law more protective of the franchisee, which is the more vulnerable party to the agreement.

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