Millennium Asset Recovery, Inc. (Millennium), a franchisee, is suing petitioner 1-800-Got Junk? LLC (Got Junk), the franchisor, for wrongfully terminating Millennium's franchise.
In the instant petition, Got Junk seeks a writ of mandate directing respondent superior court to vacate its order that the law of Washington State applies to this action and to enter a new order that California law applies. We conclude the trial court properly gave credence to the choice of law provision in the franchise agreement and therefore we deny Got Junk's petition for writ of mandate.
Because a multistate franchisor has an interest in having its franchise agreements governed by a uniform body of law, Got Junk 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 Got Junk's headquarters in Vancouver, Canada, there was a reasonable basis for the parties' choice of law.
The remaining issue is whether enforcement of the Washington choice of law provision is barred by section 20010 (California Franchise Relations Act (CFRA) (§ 20000 et seq.)). In order to protect franchisees domiciled or operating in California (§ 20015), section 20010 declares: "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." (Italics added.)
In this instance, Washington State is more protective of franchisees than California, in that Washington's Franchise Investment Protection Act (WFIPA) restricts the franchisor to four situations in which a franchisor can summarily terminate a franchise without providing notice and an opportunity to cure (Wn. Rev. Code § 19.100.180),
FACTUAL AND PROCEDURAL BACKGROUND
a. Formation of the franchise relationship.
Defendant and petitioner Got Junk, a Delaware limited liability company, the franchisor, is a junk removal franchise business headquartered in Vancouver, British Columbia, Canada.
On December 26, 2003, plaintiff and real party in interest Millennium, the franchisee, entered into an agreement with Got Junk to operate a Got Junk franchise in various territories in the Los Angeles area, including Century City, Beverly Hills and Westwood.
b. Pertinent provisions relating to choice of law.
The franchise agreement at paragraph 21.12 contains the following choice of law provision: "Governing Law. This agreement shall be construed and interpreted according to the laws of the state of Washington."
The franchise agreement contains an integration clause at paragraph 21.8, to wit: "Entire Agreement. This agreement and the other documents referred to herein or contemplated hereby set forth the entire agreement between Franchisor and Franchisee ...." (Italics added.)
The franchise agreement made specific reference to Got Junk's 2003 uniform franchise offering circular (UFOC). The 2003 UFOC contained the following advisements: "The franchise agreement states that Washington law governs the agreement, and this law may not provide the same protections and benefits as local law.... Even though the franchise agreement provides that Washington law applies, your law may supersede it in your state."
The 2003 UFOC also contains a state-specific addendum. With respect to California, the addendum provides: "The franchise agreement requires application of the laws ... of the State of Washington. This provision may not be enforceable under California law."
c. Got Junk's termination of the franchise for Millennium's alleged underreporting of revenue.
The franchise agreement obligates the franchisee, Millennium, to pay a percentage of its gross revenue to Got Junk on every junk removal job it performs.
Effective May 11, 2007, Got Junk terminated Millennium's franchise on the grounds Millennium deliberately had not reported certain jobs and the gross revenue derived from such jobs, and had not paid to Got Junk the monies to which the franchisor was entitled under the agreement. Got Junk declared Millennium's falsifying of reports a material default of the franchise agreement and terminated the franchise without giving Millennium an opportunity to cure the default.
Millennium denies any wrongdoing but concedes its drivers pocketed money on at least three jobs without reporting the payments either to Millennium or to Got Junk.
On July 2, 2007, Millennium filed suit against Got Junk in the Superior Court of Los Angeles County. The gravamen of the second amended complaint, which is the operative pleading, is that Got Junk breached the franchise agreement by terminating the franchise without cause, in that Got Junk had no reasonable basis for its contention Millennium intentionally failed to pay amounts due under the agreement. Invoking the choice of law provision in the franchise agreement, Millennium further alleged the termination was in violation of the WFIPA (Wn. Rev. Code § 19.100.010 et seq.), specifically, section 19.100.180, which strictly limits the circumstances in which a franchisor can terminate a franchise without providing notice or an opportunity to cure. Millennium pled Got Junk's failure to give it an opportunity to cure the alleged underpayment was in violation of the WFIPA.
The second amended complaint included causes of action for breach of written contract, breach of the implied covenant of good faith and fair
By way of relief, Millennium sought, inter alia, compensatory and punitive damages, as well as specific performance and an accounting.
Got Junk answered, generally denying the allegations and raising numerous affirmative defenses.
b. Millennium's first motion for summary adjudication.
On October 2, 2008, Millennium filed its first motion for summary adjudication, directed at the cause of action for breach of written contract. Millennium contended summary adjudication was appropriate because the franchise agreement specifies Washington law shall govern, and Got Junk's termination of Millennium's franchise without giving Millennium notice and an opportunity to cure violated the WFIPA.
Because Millennium filed its operative pleading, the second amended complaint, after it filed the motion for summary adjudication, the trial court (Hon. Rita Miller) declined to rule on the motion for summary adjudication. The court ruled "Millennium must file a new motion for summary adjudication. Defendant ... is entitled to oppose a new motion for summary adjudication filed by Millennium based upon the allegations contained in Millennium's Second Amended Complaint."
c. Millennium's second motion for summary adjudication.
On April 28, 2009, Millennium filed another motion for summary adjudication, again directed at the cause of action for breach of written contract. Millennium contended that pursuant to the terms of the agreement, the matter was governed by Washington law, and the WFIPA only permits a franchisor to terminate a franchise without providing notice and an opportunity to cure in four situations, none of which is present here. (See fn. 3, ante.)
On July 13, 2009, the trial court (Hon. Morris B. Jones) denied Millennium's second motion for summary adjudication on the ground the motion, if granted, would not wholly dispose of the breach of contract claim; merely establishing a breach of contract occurred, without establishing the amount of
d. Subsequent proceedings: bifurcated trial on choice of law.
At a status conference on September 4, 2009, the trial court (Hon. Rita Miller) indicated it would try the choice of law issue on declarations and directed the parties to submit declarations addressing choice of law. Thereafter, the parties filed voluminous papers on the issue.
(i) Millennium's papers.
Millennium's attorney, Bruce Napell, a certified franchise law specialist, filed a declaration which provided in relevant part: "I regularly review offering circulars and franchise agreements for clients, both to assist them with their decision whether or not to purchase a franchise, or to advise them in relations with their franchisor. In my experience most franchise agreements include a choice of law provision. Every one of the last ten franchise agreements I reviewed included a choice of law clause. This is typically done so that the Franchisor'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."
Napell noted Washington State is the closest United States jurisdiction to Got Junk's headquarters in Vancouver, Canada. Napell opined this circumstance supported the inference Washington law was chosen due to that state's proximity to Got Junk's headquarters "and because there is a benefit to a franchisor and a franchise system to having a single set of rules apply to all the agreements."
Cotton also filed a declaration, stating she recalled discussing the choice of law clause with an attorney before she entered into the franchise agreement, and that she understood Washington law would govern the agreement.
(ii) Got Junk's papers.
Brian Scudamore (Scudamore), founder and chief executive of Got Junk, filed a declaration disclaiming any knowledge as to why Got Junk's franchise agreement contains a choice of law provision. Scudamore stated: "I have reviewed the wording of Section 21.12 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 protections 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." (Italics added.)
(iii) Bifurcated trial on choice of law; trial court's ruling.
On January 6, 2010, the trial court (Hon. Rita Miller) conducted a hearing on the bifurcated choice of law determination. At the outset, the trial court announced its tentative ruling, to wit, that Washington law applies. The trial court took judicial notice of the fact the State of Washington is the closest state to Got Junk's headquarters in Vancouver, Canada, but denied the request for judicial notice of the documents attached to Napell's declaration. After hearing argument of counsel, the trial court adopted the tentative ruling as the order of the court.
The trial court ruled in pertinent part: "There was a reasonable basis for [Got Junk] to designate Washington law as the law governing the agreement. Therefore, the test set forth in the Restatement (Second) of Conflicts of Law 187(2) is satisfied. [¶] Reasonableness is an objective standard. Therefore, Mr. Scudamore's declaration about what actually happened at some point and his subjective intent is really not much help. It does not contravene the objective reasonableness of the decision to designate Washington law. It's also puzzling that he does not say why Washington law was selected as he appears to be in a position to know. Therefore, as [Millennium] puts it, if it [were] selected by random use of a dart board, Mr. Scudamore appears to have had it in his power to say so and he failed to do so.
"This is not a summary judgment motion. This is part of the trial. This is a bifurcated court decision on choice of law, so I can consider and weigh the evidence, and I find Mr. Scudamore's evidence not too useful.
"The objective facts are that it is reasonable for a company doing business in many states to designate the laws of one state in a contract that will be used in many states. If the company's lawyers are already familiar with the laws of that one state and find them favorable, they will not have to expend
The trial court indicated the matter would proceed to a trial on the merits on January 26, 2010, but that it would stay the matter if Got Junk sought writ review.
On January 14, 2010, Got Junk filed the instant petition for writ of mandate, seeking to overturn the trial court's ruling Washington law applies to the breach of contract action. We issued an order to show cause.
The essential issues presented are whether a reasonable basis exists for the parties' choice of Washington law, and if so, whether enforcement of the choice of law provision is barred by section 20010.
1. Overview; a reasonable basis exists for the Washington choice of law provision; the instant choice of law provision is not barred by section 20010; therefore, the trial court properly held the choice of law provision is enforceable.
In 1980, California adopted the CFRA (Stats. 1980, ch. 1355, § 1, p. 4888) to protect individuals from the loss of their investments in franchises. (Thueson v. U-Haul Internat., Inc. (2006) 144 Cal.App.4th 664, 673 [50 Cal.Rptr.3d 669] (Thueson).) The CFRA governs, inter alia, the termination of franchises (§ 20020 et seq.) and the nonrenewal of franchises (§ 20025 et seq.).
Section 20010 provides: "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." Therefore, the parties herein could not agree to "waive compliance" with any provision of the CFRA.
In this choice of law dispute, Millennium, the franchisee, has sought enforcement of the Washington choice of law provision in the franchise agreement. Got Junk, the franchisor, has resisted that position and insists on the application of California law. When the choice of law issue was tried in the court below, the parties focused on whether there was a reasonable basis
Remarkably, the bifurcated choice of law trial proceeded without any consideration of the CFRA, the California statutory scheme governing franchise relations. The parties and trial court overlooked the critical issue herein, namely, the impact of the CFRA, specifically, section 20010, on the enforceability of the choice of law provision in the franchise agreement.
In order to obtain enforcement of the Washington choice of law provision, Millennium was required to show a reasonable basis for its inclusion in the franchise agreement. (Washington Mutual Bank v. Superior Court (2001) 24 Cal.4th 906, 917 [103 Cal.Rptr.2d 320, 15 P.3d 1071].) To avoid enforcement of the choice of law provision, Got Junk then was required to show the chosen law is contrary to a fundamental public policy of this state. (Ibid.)
As explained below, we conclude a reasonable basis existed for the inclusion of the Washington choice of law provision in the franchise agreement. Further, California public policy is not offended by the franchise agreement's granting the franchisee greater protection than what is mandated by the CFRA. Therefore, the trial court properly gave credence to the franchise agreement's designation of Washington law.
2. Absent a public policy exception, contractual choice of law provisions are generally enforceable.
3. Initial burden is on the party seeking to enforce the choice of law provision (here, Millennium) to show the provision is enforceable.
4. Trial court properly found Millennium showed a reasonable basis for the parties' choice of Washington law.
a. It is undisputed Washington lacks a substantial relationship to the parties or the transaction.
Millennium admitted in its papers below "there is no substantial relationship between [Millennium] or the transaction ... and the State of Washington."
Nonetheless, as discussed below, Millennium satisfied the alternative prong of the test.
b. Irrespective of lack of substantial relationship to Washington State, Millennium showed a reasonable basis exists for the franchise agreement's selection of Washington law.
As indicated, the declaration of Napell, an experienced franchise lawyer, stated there is a benefit to a franchisor and a franchise system in having a single set of rules apply to all franchisees, and because Washington State is the closest United States jurisdiction to Got Junk's headquarters in Vancouver, Canada, it was reasonable for Got Junk to have designated the law of that state in the choice of law provision.
For example, in the McDonald's case, the court found "Because McDonald's enters into a substantial number of franchise agreements in various states, it has an interest in having those agreements governed by one body of law. Following its contractual choice of law will effectuate its intent. We will, therefore, apply Illinois law to determine the validity of the assignments under the franchise agreements." (McDonald's, supra, 625 F.Supp. at p. 880.)
Likewise, in Pillsbury, involving the franchisor of Haagen-Dazs ice cream shops, the court held "HDSC ... has a substantial interest in the application of one state's contract laws to all of its franchise agreements, as application
Here, the trial court's determination a reasonable basis existed for the Washington choice of law provision is supported by Napell's declaration on behalf of Millennium, and is consistent with case law recognizing the interest of uniformity in franchise operations. Because a multistate franchisor has an interest in having its franchise agreements governed by one body of law, Got Junk had a reasonable basis for inserting a choice of law provision in the franchise agreement. Further, given Washington State's proximity to Got Junk's headquarters in Vancouver, Canada, there was a reasonable basis for the designation of that state's law in particular.
However, this discussion does not end our inquiry.
5. The instant choice of law provision which gives the franchisee enhanced protection under Washington law is not barred by California's stated public policy.
a. Overview of California statutory scheme.
The provisions of the CFRA "apply to any franchise where either the franchisee is domiciled in this state or the franchised business is or has been operated in this state." (§ 20015.)
b. Section 20010 prohibits a franchise agreement from requiring a franchisee to waive compliance with the protections of the CFRA; the instant choice of law provision, giving the franchisee superior protection under Washington law, is not barred by section 20010
The pivotal section of the CFRA for our purposes is section 20010, an antiwaiver provision. It states: "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."
The essential issue presented is whether section 20010 invalidates the Washington choice of law provision in the instant franchise agreement. The parties have not cited any case law directly on point, nor has our independent research revealed any. Therefore, we look for guidance to case law construing a related statutory scheme, namely, California's Franchise Investment Law (CFIL) (Corp. Code, § 31000 et seq.).
By way of background, the stated intent of the CFIL is "to provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered. Further, it is the intent of this law to prohibit the sale of franchises where the sale would lead to fraud or a likelihood that the franchisor's promises would not be fulfilled, and to protect the franchisor and franchisee by providing a better understanding of the relationship between the franchisor and franchisee with regard to their business relationship." (Corp. Code, § 31001.)
Wimsatt v. Beverly Hills Weight etc. Internat., Inc. (1995) 32 Cal.App.4th 1511 [38 Cal.Rptr.2d 612] (Wimsatt), addressed the validity of a franchise agreement's forum selection clause, requiring the franchisees to sue in Virginia, in light of the CFIL's antiwaiver provision. (Corp. Code, § 31512.) Wimsatt observed, "One of the most important protections California offers its franchisee citizens is an antiwaiver statute which voids any provision in a franchise agreement which waives any of the other protections afforded by the Franchise Investment Law. (Corp. Code, § 31512.)" (Wimsatt, supra, at p. 1520.) Wimsatt held enforcement of the forum selection clause was not barred by Corporations Code section 31512 if the forum selection clause did "not subvert substantive rights afforded California citizens." (Wimsatt, supra, at p. 1514, italics added.) The critical inquiry was whether enforcement of the forum selection clause would "diminish [franchisees'] rights under the Franchise Investment Law." (Id. at p. 1524, italics added.) Because that issue had not been developed in the trial court or in the briefing on appeal, the matter was remanded for further proceedings in that regard. (Ibid.)
Burgo v. Lady of America (C.D.Cal., May 4, 2006, No. SA CV 05-0518) (Burgo) (order granting in part and denying in part motion to dismiss complaint), is consistent with Wimsatt. In Burgo, the court addressed the validity of a franchise agreement's choice of law provision calling for the application of Florida law, in light of the CFIL's antiwaiver provision. (Corp. Code, § 31512.) Burgo held the CFIL's antiwaiver provision "prohibits parties [from] contracting around the substantive provisions of the statutory protective scheme in question." Burgo determined, "a comparison of Florida and California's franchise statutes shows that Florida provides significantly less protection to franchisees.... Substantively, [the] CFIL is quite broad, covering material misrepresentations or omissions in either oral or written form in connection with the sale of a franchise. See Cal. Corp. Code § 31201. In contrast, the [Florida Franchise Act] only prohibits fraud in three scenarios: `(1) when the chances of success for a franchisee are misrepresented; (2) when the total investment for a franchise is misrepresented; or (3) when the franchisor misrepresents its efforts to establish more franchises in a given area than is reasonably expected for the given area to sustain.' Grand Kensington, [LLC v. Burger King Corp. (E.D.Mich. 2000) 81 F.Supp.2d 834,] 838 (citing Fla. Stat. § 817.416(2)). Based on the foregoing, ... application of Florida law would be contrary to California's fundamental public policy of not permitting its franchisees to contract around California's statutory protections."
We further note that had the Legislature intended the restriction in section 20010 to have the absolute effect suggested by Got Junk, it could have so specified. By way of comparison, the CFRA, at section 20040.5, categorically prohibits forum selection clauses in franchise agreements, stating: "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 franchise business operating within this state."
c. Got Junk's argument that Washington law does not apply extraterritorially is unavailing.
Finally, Got Junk contends the choice of law provision, calling for the application of Washington law, is unenforceable because "[n]owhere in WFIPA does the Washington legislature expressly declare any intent for WFIPA to apply to disputes occurring outside of Washington."
The argument is an irrelevancy. Irrespective of whether the WFIPA otherwise contains territorial restrictions on its application, the parties were free to agree that their franchise relations would be governed by Washington substantive law and they did precisely that, by way of a valid choice of law clause. Therefore, this state's superior court will adjudicate the matter pursuant to the parties' chosen law.
It is unnecessary to address any remaining arguments of the parties.
Got Junk cannot avoid the Washington choice of law provision it included in the franchise agreement.
Because a multistate franchisor has an interest in having its franchise agreements governed by a uniform body of law, Got Junk had a reasonable
The order to show cause is discharged. The petition for writ of mandate is denied. Millennium shall recover its costs in this proceeding. (Cal. Rules of Court, rule 8.493.)
Croskey, J., and Aldrich, J., concurred.
All further statutory references are to the Business and Professions Code, unless otherwise specified.
Likewise, Taylor v. 1-800-Got-Junk?, LLC (W.D.Wn. 2009) 632 F.Supp.2d 1048, 1051-1052, which held the Washington choice of law clause in an Oregon Got Junk franchise's agreement was enforceable, is not on point because it does not involve the California statutory scheme. Our decision is controlled by the CFRA and specifically by section 20010 thereof.