Franchise Agreement Requiring Out of State Mediation Is Unenforceable in California
Dispute resolution provisions in franchise agreements often address how, when, and where parties will mediate. However, the enforceability of these provisions can change depending on the law of the state governing the franchise agreement at issue. A federal district court decision highlights this tension in Capital v. Allison.
Argus Capital Management LLC (“Capital”) entered into a franchise agreement with The Ground Guys SPC (“The Ground Guys”). The franchise agreement had a provision requiring that mediation occur in Texas prior to commencement of litigation. But, since Capital was a California-based franchisee, an addendum to the franchise agreement stated that the California Franchise Relations Act controlled over any otherwise inconsistent provisions in the agreement. The California Franchise Relations Act makes any franchise agreement provision mandating that a mediation occur outside of California void. When Capital filed a complaint in the U.S. Court for the Eastern District of California against The Ground Guys, The Ground Guys moved to dismiss Capital’s claims by arguing the mediation provision in the franchise agreement required the parties to first mediate in Texas.
The court denied The Ground Guys’ motion to dismiss.
Holdings
Location Restrictions Violate California Law. The Court held that because California law controlled over inconsistent provisions in the franchise agreement, a requirement that mediation occur in Texas was unenforceable since it violated the California Franchise Protection Act.
Minimum Time for Mediation Enforceable. The Court distinguished this case from an earlier federal district court decision that enforced a mediation provision requiring mediation be at least four hours. Capital v. Allison was different because the question was about a mediation’s location and not its duration. Time restrictions in mediation provisions do not violate the California Franchise Protection Act and, thus, are enforceable against a franchisee.
Lesson Learned
Franchisors should be aware of the laws of the particular states where they are selling franchises. Courts will enforce a particular state’s laws as they relate to franchise relationships regardless of the terms of the franchise agreement at issue.
Special thanks to Malvika Mahendhravarman, a summer associate in Foley’s Dallas office, for her contributions to this article.
