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The Franchise Memorandum

Texas Federal Court Partially Grants Franchisor’s Motion to Dismiss California Franchise Law Claims
Posted in Choice of Law

A federal court in Texas granted in part and denied in part a franchisor’s motion to dismiss a franchisee’s counterclaims under California state law. Jack in the Box Inc. v. San-Tex Rests., Inc., 2021 WL 148058 (W.D. Tex. Jan. 14, 2021). Jack in the Box entered into franchise agreements for 49 Texas restaurant locations with Atour Eyvazian and Anil Yadav, who, on the same day, assigned the franchise agreements to San-Tex Restaurants. The franchise agreements contained a choice of law provision contemplating the application of California law to claims “regarding the making, entering into, performance or interpretation” of the franchise agreement. Following San-Tex’s alleged operational and financial deficiencies, Jack in the Box terminated the franchise agreements. When San-Tex continued to operate the restaurants, Jack in the Box sued San-Tex for breach of the franchise agreements and leases and copyright infringement. In its counterclaim, San-Tex alleged, among other claims, that Jack in the Box violated the California Franchise Relations Act (CFRA) and the California Unfair Practices Act (CUPA).

While the court granted Jack in the Box’s motion to dismiss as to the CFRA claim, it denied the motion with regard to the CUPA claim. The court recognized coverage under the CFRA is limited to franchisees domiciled in California and franchised businesses presently or formerly operating in California. The court noted the CFRA was not designed nor intended to regulate claims of non-residents arising from conduct occurring entirely outside California. Although Yadav, an original franchisee, was domiciled in California, there was no allegation of Yadav’s ownership interest in San-Tex and therefore no basis to apply the protections of the CFRA to San-Tex. As none of the relevant San-Tex restaurants had ever operated in California, the court found San-Tex could not meet the CFRA’s jurisdictional requirement and dismissed San-Tex’s CFRA claim. The CUPA, however, lacks a similar jurisdictional requirement and reaches out to non-residents when the allegedly fraudulent conduct occurred in California. As Jack in the Box’s headquarters were in California, a reasonable inference could be drawn that misconduct occurred in California. The court found this inference, coupled with the parties’ contemplation of the application of California law, was sufficient to afford San-Tex the protections of the CUPA.

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