Brown v. DetailXPerts Franchise Systems, LLC

Background

Michael Brown and Bobcat 1 Enterprises, Inc. entered into a franchise agreement with DetailXPerts Franchise Systems, LLC to operate a vehicle-detailing franchise in Morgan Hill, California. Brown is identified as a California resident, and Bobcat 1 Enterprises is identified as a California corporation with its principal place of business in Gilroy, California. DetailXPerts is identified as a Michigan limited liability company with its principal place of business in Chattanooga, Tennessee.

The plaintiffs later notified DetailXPerts that they were rescinding the franchise agreement and stopped operating the franchise. They filed this lawsuit alleging fraudulent misrepresentations during negotiations, along with claims under the California Franchise Investment Law, California’s unfair-competition statute, fraudulent misrepresentation, deceit and concealment, negligent misrepresentation, unjust enrichment, and declaratory relief challenging the arbitration clause.

The agreement required covered disputes to go through mediation and then binding arbitration in Detroit, Michigan. It also stated that disputes would generally be governed by Michigan law and that, for court proceedings outside arbitration, the exclusive venue would be state or federal courts in Detroit, Michigan. In an earlier order, the court compelled arbitration, denied a venue-dismissal request, denied the transfer request without prejudice, and stayed the case. The court later lifted the stay because the plaintiffs had not initiated arbitration. The plaintiffs then filed a second amended complaint.

Motion to Dismiss

DetailXPerts moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that the arbitration agreement covered the claims and that the agreement’s exception for requests for injunctive relief did not apply because the complaint did not seek an injunction. The plaintiffs agreed that the arbitration agreement covered the claims but argued that the arbitration clause itself was unconscionable, meaning legally unenforceable because of unfairness in how it was made or in what it required.

The court explained that the court, rather than an arbitrator, decides whether the arbitration clause itself is unconscionable. Under both California and Michigan law, the relevant analysis requires procedural unconscionability and substantive unconscionability. Procedural unconscionability concerns oppression or surprise, including unequal bargaining power, lack of meaningful choice, or hidden terms. Substantive unconscionability concerns unfairness in the terms themselves.

The parties submitted conflicting evidence about whether the franchise agreement was presented as a “take it or leave it” arrangement and whether DetailXPerts would negotiate. Because those factual disputes could not be resolved on a motion to dismiss, the court could not decide procedural unconscionability or the overall enforceability of the arbitration clause at that stage. Accepting the complaint’s allegations as true, the court found that the plaintiffs had stated a claim that the arbitration agreement was unconscionable. The court therefore denied DetailXPerts’s motion to dismiss.

Motion to Transfer

DetailXPerts also sought transfer to the Eastern District of Michigan under 28 U.S.C. § 1404(a), relying on the agreement’s forum-selection clause. The plaintiffs argued that California’s Franchise Relations Act made the clause unenforceable because the franchise operated in California. The court agreed that the clause was invalid under California Business and Professions Code § 20040.5, which expresses California’s strong policy against requiring litigation outside California for claims involving a franchise operating in the state.

Because the forum-selection clause was invalid, the court evaluated the ordinary convenience and fairness factors without giving that clause controlling effect. The Eastern District of Michigan was a district where the case could have been brought because DetailXPerts was identified as a Michigan limited liability company. However, the plaintiffs chose California, the franchise was located there, and California has a strong policy of providing a protective local forum for local franchisees.

The court recognized that some considerations favored Michigan, including Michigan’s familiarity with Michigan law, DetailXPerts’s assertion that litigation would cost less there, and the existence of other Michigan cases involving DetailXPerts that might involve overlapping witnesses or evidence. But DetailXPerts did not show that evidence or witnesses would be more accessible in Michigan, did not establish that transfer would produce meaningful efficiencies, and did not meet its burden to prove that transfer was warranted. The court therefore denied the motion to transfer.

Disposition and Next Steps

The court denied both the motion to dismiss and the motion to transfer. It ordered the parties to meet by telephone or videoconference to develop a schedule providing for trial within one year of the order. They were required to discuss whether discovery was needed or whether the case could proceed directly to summary-judgment motions, and to file a joint case-management statement with a discovery plan and scheduling proposal. The court also scheduled a case-management conference for September 22, 2020.