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Servpro Industries, Inc. v. Woloski

United States District Court, M.D. Tennessee, Nashville Division

August 5, 2019

SERVPRO INDUSTRIES, INC., Plaintiff/Counterclaim Defendant,
v.
TAMMY WOLOSKI, PAUL WOLOSKI, and DELTA DAWGS CONSTRUCTION CORP. d/b/a SERVPRO OF ROSEMEAD/SOUTH EL MONTE, Defendants/Counterclaim Plaintiffs,
v.
RICHARD CONNOR, Counterclaim Defendant.

          HOLMES, MAGISTRATE JUDGE.

          MEMORANDUM

          WILLIAM L. CAMPBELL, UNITED STATES DISTRICT JUDGE.

         I. Introduction

         Pending before the Court are a Partial Motion to Dismiss Counterclaims (Doc. No. 86), filed by Counterclaim Defendants Servpro Industries, Inc. and Richard Connor (hereinafter “Servpro”); an Opposition brief (Doc. No. 90), filed by Counterclaim Plaintiffs Tammy Woloski, Paul Woloski, and Delta Dawgs Construction Corporation (hereinafter “Delta Dawgs”); and Servpro's Reply (Doc. No. 96). For the reasons set forth below, the Partial Motion to Dismiss Counterclaims (Doc. No. 86) is GRANTED, in part, and DENIED, in part. Accordingly, Delta Dawgs' first, fourth, fifth, and seventh counterclaims are dismissed. The second counterclaim was dismissed by previous Order (Doc. No. 99). The third and sixth counterclaims remain pending.

         II. Factual and Procedural Background

         Servpro Industries, Inc., a franchisor of cleaning and damage restoration services, initially brought this action against Tammy Woloski, Paul Woloski, and Delta Dawgs Construction Company d/b/a Servpro of Rosemead/South El Monte, alleged to be a former franchisee, for federal statutory trademark infringement; federal common law trademark infringement and unfair competition; and breach of contract as to the Franchise License Agreement (“Franchise Agreement”), a Guaranty, and a Secured Promissory Note. (Doc. No. 1). In turn, Delta Dawgs' latest pleading brings the following counterclaims: violations of the California Franchise Relations Act (“CFRA”); a class action claim for violations of the California Business & Professions Code Section 17200; breach of contract; breach of the implied covenant of good faith and fair dealing; violations of the California Penal Code Section 496; violations of 42 U.S.C. § 1981; and violations of California Civil Code Section 51.8. (Doc. No. 83). Through the pending Motion, Servpro seeks to dismiss all the counterclaims except the one alleging breach of contract.

         III. Analysis

         Through the first counterclaim, Delta Dawgs seeks to enforce CFRA Sections 20020 (Grounds for Termination), 20035 (Termination or Failure to Renew), and 20040.5 (Venue) against Servpro. Servpro argues this counterclaim should be dismissed because the parties agreed to a Tennessee choice-of-law provision in their agreements, and there is no prevailing California public policy that overrides the agreements.

         The choice-of-law provision, in Section 13.10 of the Franchise Agreement, states:

13.10 Governing Law. This Agreement, the rights granted and the relationship created hereunder shall be governed, interpreted and construed in all respects in accordance with the internal laws of the State of Tennessee without regard to its conflicts of laws provisions, except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. § 1051 et seq.)

(Doc. No. 1-1, at 37).

         The “Addendum to the Franchise License Agreement for the State of California” provides in Paragraph 6:

6. Section 13.10, Governing Law, is amended by adding: The Agreement requires application of the law of the State of Tennessee. This provision may not be enforceable under California law.

(Doc. No. 1-1, at 43).

         A federal court sitting in diversity must apply the forum state's choice-of-law rules to determine which state's laws govern the dispute. See, e.g., Town of Smyrna, Tenn. v. Municipal Gas Auth. of Ga., 723 F.3d 640, 645 (6th Cir. 2013).[1] Under Tennessee law, a contract is presumed to be governed by the law of the jurisdiction in which it was executed, absent a contrary intent. Id. If the parties contracted to be governed by the law of a specific jurisdiction, however, Tennessee will honor that choice if the following requirements are met:

The choice of law provision must be executed in good faith. Goodwin Bros. Leasing, Inc. v. H & B Inc., 597 S.W.2d 303, 306 (Tenn.1980). The jurisdiction whose law is chosen must bear a material connection to the transaction. Id. The basis for the choice of another jurisdiction's law must be reasonable and not merely a sham or subterfuge. Id. Finally, the parties' choice of another jurisdiction's law must not be ‘contrary to “a fundamental policy” of a state having [a] “materially greater interest” and whose law would otherwise govern.' Id., n. 2 (citing RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 187(2) (1971)).

Messer Griesheim Indus., Inc. v. Cryotech of Kingsport, Inc., 131 S.W.3d 457, 475 (Tenn. Ct. App. 2003).

         As to the first requirement, Delta Dawgs does not appear to contend the choice-of-law provision was executed in bad faith. In addressing the second requirement, Servpro argues Tennessee bears a material connection to the transaction because its principal place of business is in Gallatin, Tennessee, and franchisees, including Delta Dawgs, attend training at the corporate headquarters there and make payments to Servpro in Tennessee. Delta Dawgs does not dispute these connections, but instead argues that California's compelling interest in consumer protection, as evidenced by its comprehensive statutes in the area, demonstrates its greater interest in litigating disputes governing franchise relationships.

         The Sixth Circuit addressed a similar argument in Banek v. Yogurt Ventures U.S.A., Inc., 6 F.3d 357, 362 (6th Cir. 1993), in considering whether a Michigan district court should enforce a choice-of-law clause designating Georgia law apply to the parties' contract. The Banek Court explained that recognizing Michigan's “comprehensive and paternalistic franchise investment law” as representing the state's public policy “does not end the inquiry.” Id. “The more central question, ” the court explained, “is whether the parties have selected, through their choice-of-law provision, a jurisdiction [Georgia] in which there is a substantial erosion of the quality of protection that the [Michigan franchise law] would otherwise provide.” Id. Because the plaintiff failed to show application of Georgia law would violate a specific fundamental policy of Michigan, the court upheld the choice-of-law provision. Id., at 363 (“It is not sufficient for plaintiff to simply assert that Michigan law should apply ‘merely because a different result would be reached under' Georgia law.”)

         Delta Dawgs' brief is wholly devoid of any discussion of Tennessee law governing franchise relationships. Therefore, Delta Dawgs has failed to demonstrate Tennessee law is “contrary to a fundamental policy of a state having a materially greater interest.” Nor has Delta Dawgs established that Tennessee has “no material connection” to the transaction, or that the parties' selection of Tennessee law was unreasonable and a sham. Accordingly, the Court concludes the choice-of-law provision in the Franchise Agreement is enforceable.

         Given the Court's conclusion, Delta Dawgs' first counterclaim may not be maintained as a stand-alone claim based on California law. Delta Dawgs contends, however, that the parties incorporated the CFRA through the “California Addendum” to the Franchise Agreement, which provides, in part, as follows:

This Addendum to Franchise License Agreement is made in recognition of the requirements of the California Business and Professions Code Sections 20000 to 20043. The parties to the attached Servpro Industries, Inc. Franchise License ...

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