Court: Court of Appeals for the Ninth Circuit; May 3, 2000; Federal Appellate Court
GNC Franchising, Inc. appeals the district court's refusal to enforce a forum selection clause in its franchise agreement with Charles B. Jones, arguing that the court erred in denying its motions to dismiss or transfer venue under 28 U.S.C. §§ 1404 and 1406. GNC, based in Pennsylvania and franchisor of General Nutrition Stores, entered into agreements with Jones, the franchisee of a store in California, which included choice of law and forum selection clauses requiring that disputes be litigated in Pennsylvania. Following a dispute, Jones filed suit in California state court, which GNC removed to federal court, citing diversity jurisdiction. The district court denied GNC's motions, finding the forum selection clause unenforceable due to California's public policy against such provisions and also refusing to transfer under the "interest of justice" standard. GNC sought permission to appeal, which was granted. The court noted that in diversity cases, federal law governs the enforcement of forum selection clauses, referencing the Supreme Court's decision in M/S Bremen v. Zapata Off-Shore Co. as guiding precedent for motions to dismiss based on such clauses.
The Supreme Court in Bremen established that a forum selection clause is generally valid unless the challenging party demonstrates that enforcement would be unreasonable and unjust or that the clause is invalid due to fraud or overreaching. Additionally, such clauses can be deemed unenforceable if they violate a strong public policy of the forum where the suit is filed. Even if the clause arises from fair bargaining and does not violate public policy, it can still be deemed unreasonable if the chosen forum is significantly inconvenient. The burden of proof lies heavily on the party contesting the clause.
In this case, the district court refused to enforce the forum selection clause, determining that it violated California's public policy against enforcing such clauses in franchise agreements, as outlined in Section 20040.5 of the California Business and Professions Code. This section invalidates any clause in a franchise agreement that restricts venue to an out-of-state forum for claims related to franchises operating within California. The clause in question sought to restrict venue to Pennsylvania courts, which the court found to be void under California law.
GNC argued that the district court incorrectly interpreted the California statute as embodying a strong public policy that precludes enforcement under federal law. However, the court rejected this argument, affirming that Section 20040.5 reflects a strong public policy aimed at protecting California franchisees from the challenges of litigating in non-California venues. Consequently, the provision requiring a California franchisee to litigate claims in another state directly contradicts this public policy and is unenforceable. As a result, the court upheld the district court’s decision to deny GNC's motion to dismiss or transfer the case under Section 1406(a).
Additionally, GNC contested the denial of its motion to transfer the venue to the Western District of Pennsylvania under Section 1404(a), with the order being reviewed for abuse of discretion.
Under 28 U.S.C. § 1404(a), district courts have the discretion to transfer venue based on a case-by-case assessment of convenience and fairness. Several factors must be considered in this determination, including the location of relevant agreements, familiarity with governing law, the plaintiff's choice of forum, the parties' contacts with the forum, the nature of the plaintiff's claims, litigation costs, the ability to compel witness attendance, and access to evidence. A forum selection clause is a significant factor, alongside the public policy of the forum state.
In this case, the district court assessed these factors and concluded that GNC did not demonstrate that Pennsylvania was a more suitable forum than California. Despite the forum selection clause favoring Pennsylvania, the court found compelling reasons to favor California, including the negotiation and execution of related agreements primarily occurring there, the plaintiff's choice being supported by California's protective policies for local franchisees, and stronger contacts with California regarding the claims. The court also noted that the financial burdens of litigation and the location of witnesses favored California.
Ultimately, the appellate review affirmed the district court's decision, indicating no abuse of discretion in denying GNC's motion to transfer venue. The judgment was upheld in all respects.
Fireman's Fund Ins. Co. v. M.V. DSR Atlantic highlights the legislative intent behind California Business and Professions Code § 20040.5, which prohibits forum selection clauses that may disadvantage California franchisees. The author of the bill expressed concerns that these clauses often require franchisees to litigate in out-of-state courts, imposing significant costs and challenges. Such provisions are typically non-negotiable and may be considered unconscionable due to the imbalance in bargaining power. The state's interest in protecting its residents justifies the voiding of these clauses. Relevant case law, including Stewart Org. v. Ricoh Corp. and Lou v. Belzberg, indicates that while forum selection clauses are not determinative, they are factors in a court's analysis under 28 U.S.C. § 1404(a). The public policy of the forum is one consideration among others when evaluating the "interest of justice." Under the doctrine of forum non conveniens, the burden rests with the party seeking to transfer the case to establish the existence of an adequate alternative forum.
