Abstract
A national tax service franchisor sued its California franchisee in Virginia for breach of a franchise agreement. The agreement included choice of law and forum selection clauses designating Virginia law and courts, but in compliance with California law, the agreement also included an addendum recognizing that California provided franchisees with certain rights. Faced with a motion to dismiss or transfer, the Virginia court determined California law would apply to aspects of the agreement and transferred the case, emphasizing California's strong public policy interest in providing a local forum for California franchisees and the parties' acknowledgement of that interest via the addendum.
Background
JTH Tax, better known as Liberty Tax Service, franchises income tax preparation service centers throughout the United States. One franchisee, David Leggat, operated a service center in Palm Desert, California. Leggat signed a Franchise Agreement in which he agreed to take certain actions upon termination of the agreement. The agreement included a choice of law clause specifying Virginia law and a forum selection clause specifying Virginia as the forum to litigate disputes. Importantly, the agreement also included a "California Addendum," which acknowledged that the choice of law clause might not be enforceable under California law and recognized that California law provided certain rights to California franchisees.
Leggat eventually allowed the Franchise Agreement to expire. Liberty, however, alleged that Leggat violated the agreement by continuing to operate a tax preparation business at the Palm Desert location after termination. It sued Leggat in Virginia, after which Leggat filed a motion to transfer the case to California. This order followed.
The Leggat Order
Relying heavily on the addendum, the court granted Leggat's transfer motion. The court began by addressing the governing law. While the Franchise Agreement specified Virginia as the choice of law, the court recognized that the California Addendum added ambiguity by acknowledging that the choice of law provision could be invalid under California law. It concluded that the California Addendum did not invalidate the choice of law provision but applied where Virginia law was inconsistent with California law, as specified in the addendum.
Turning to Leggat's transfer motion, the court asked two questions: (1) whether the claims could have been brought in California and (2) whether the interest of justice and the convenience of the parties and witnesses supported transfer. The court determined that the answer to the first question was yes. The core dispute was that Leggat had continued to operate a tax preparation business at the Palm Desert location, and so the dispute arose out of actions taken in California.
The answer to the second question was less straightforward. The court considered four factors: (i) the weight that it should give to Liberty's choice of venue, (ii) witness convenience and access to dispute, (iii) convenience of the parties, and (iv) the interest of justice. The court found that factors (i) and (iii) weighed against transfer—Liberty had bargained for a Virginia forum, and though California was a more convenient option for Leggat, the court noted that transfer would merely shift the inconvenience to Liberty. The court found factor (ii) was neutral, because neither party provided specific details of the proposed witnesses or their testimony for the court to consider. But the court focused on factor (iv), finding it favored transfer. In particular, the court recognized that California had expressed a strong public policy in favor of California franchisees litigating in California. The California Addendum demonstrated that the parties intended to have California law apply to certain aspects of the contract and put them on notice that they could legitimately expect to litigate in California. Moreover, the key provisions for the dispute would likely be governed by California law, not Virginia law, and California courts would be more familiar with California law than Virginia courts. Taken together, these considerations meant that the interest of justice weighed in favor of transfer, and so the court granted the motion.
Strategy and Conclusion
As seen in this case, California has a strong public policy in favor of providing California franchisees with a California forum to litigate disputes. Companies with California franchises should be aware of the risk that disputes may not be litigated in their preferred jurisdiction but in California, even if they have included choice of law and forum selection clauses specifying different jurisdictions in their franchise agreements. When fighting transfer motions, companies should emphasize the public policy considerations of their chosen jurisdiction.
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