The Franchise Memorandum

In Aussie Pet Mobile Inc. v. Benton, 2010 U.S. Dist. LEXIS 65126 (C.D. Cal. June 28, 2010), a California federal court denied a franchisee’s motion to dismiss, finding that the franchisee’s attendance at mandatory training in the franchisor’s home state of California was sufficient grounds for the California court to exercise personal jurisdiction over a principal of the franchisee, who was a resident of Ohio. Under federal law, a court can exercise jurisdiction over the resident of another state if (a) the defendant has purposefully directed activities within the forum state or is a resident of that state, (b) the suit at issue relates to those activities, and (c) exercising jurisdiction over the out-of-state party is “reasonable” and is consistent with “fair play and substantial justice.” The franchisee in this matter had voluntarily traveled to the franchisor’s home state to attend training related to the franchised business, satisfying the first prong of the test. Further, the franchisor’s complaint alleged that the franchisee had closed its franchised business and started a similar, competing business, in violation of the franchise agreement, utilizing trade secrets learned during training. Finally, the court rejected the argument that litigating in California would cause undue expense, noting that the remaining franchisee-related defendants would have to litigate in California, and all defendants shared the same attorney. Under these circumstances, the court found that exercise of jurisdiction over the Ohio defendant was reasonable and consistent with the concepts of fair play and substantial justice.

Notably, the court granted the franchisee’s motion to dismiss with respect to the non-compete covenant contained in the franchise agreement, holding that it was unreasonably broad and unenforceable under both Ohio and California law. The covenant prevented “anyone affiliated with Defendants’ franchise from providing any similar services, anywhere.” The court found that this broad provision was “greater than required” to protect the franchisor’s legitimate business interest, and the covenant was held to be invalid.