v. KBS America, Inc. et al

Filing 76

MEMORANDUM Opinion Signed by the Honorable John F. Grady on 3/29/2012. Mailed notice(cdh, )

09-6665.121-JCD

March 29, 2012

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
KOREAN AMERICAN BROADCASTING
COMPANY, INC., KM COMMUNICATIONS,
INC., and KM LPTV OF CHICAGO-28,
LLC,
Plaintiffs,
v.
KOREAN BROADCASTING SYSTEM and
KBS AMERICA, INC.,
Defendants.

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No. 09 C 6665

MEMORANDUM OPINION
Before the court is the motion of KBS America, Inc. to dismiss
the Second Amended Complaint for improper venue pursuant to Rule
12(b)(3) or, in the alternative, to transfer the case pursuant to
28 U.S.C. § 1404. For the following reasons, the motion is denied.
BACKGROUND
This

is

plaintiffs.

a

diversity

action

brought

by

three

affiliated

We granted in large part the motion of defendant KBS

America, Inc. (“KBS”) to dismiss the Second Amended Complaint. See
Korean Am. Broad. Co. v. Korean Broad. Sys., No. 09 C 6665, 2011 WL
2436281 (N.D. Ill. June 9, 2011). The sole remaining claim is that
of KM LPTV of Chicago-28, LLC (“Channel 28”) against KBS in Count
I for violation of the Illinois Franchise Disclosure Act.

KBS now

moves to dismiss the claim based on a forum-selection clause in the

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alleged franchise agreement.

In the alternative, KBS seeks a

transfer of the case to the Central District of California.
DISCUSSION
The Illinois Franchise Disclosure Act (the “Franchise Act” or
“Act”) provides a civil cause of action for damages caused by the
termination of, or failure to renew, a franchise in violation of
the statute.

815 ILCS 705/26.

The Franchise Act states in

relevant part:
Nonrenewal of a franchise. It shall be a violation of
this Act for a franchisor to refuse to renew a franchise
of a franchised business located in this State without
compensating the franchisee either by repurchase or by
other means for the diminution in the value of the
franchised business caused by the expiration of the
franchise where:
. . .
(b) the franchisee has not been sent notice of the
franchisor’s intent not to renew the franchise at least
6 months prior to the expiration date or any extension
thereof of the franchise.
815 ILCS 705/20. The statute defines a “franchise” as an agreement
that has certain enumerated characteristics.
In

our

June

2011

opinion,

we

focused

815 ILCS 705/3(1).
on

the

following

paragraphs of the Second Amended complaint in finding that Channel
28 sufficiently states a Franchise Act claim against KBS:
61.
There had been the agreements between KBS, KBS
America and Channel 28, such as the first written
agreement, the written agreement attached and the oral
agreement upon expiration of the written agreement. Such
agreements granted Channel 28 the right to engage in the
business of distributing KBS and KBS America’s services
under a system prescribed in substantial part by KBS and
KBS America.

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62.
The operation of Channel 28 was substantially
associated with KBS and KBS America’s intellectual
property and commercial symbols designating the content
as KBS’.
63.
The payments made by Channel 28 to KBS and KBS
America constituted franchise fees in excess of $500.00.
64. Accordingly, Channel 28 is a franchise of KBS and/or
KBS America.
(Second Am. Compl. ¶¶ 61-64 (citations to exhibits omitted).)

We

stated: “[W]e will construe ‘such’ as meaning ‘these,’ and thus
that Channel 28 is alleging that 3 agreements created a franchise:
(1) the January 2005 agreement that is written in Korean, Exhibit
2 to the Second Amended Complaint; (2) the July 2005 agreement that
is written in English, Exhibits 3 and 4 to the Second Amended
Complaint (the ‘Agreement’); and (3) the oral agreement alleged in
paragraph 36 of the Second Amended Complaint.” 2011 WL 2436281, at
*2.
KBS contends that Channel 28’s claim should be dismissed due
to a forum-selection clause in the Agreement, which provides:
Governing Law; Jurisdiction. This Agreement shall be
governed by, construed and interpreted in accordance
with the laws of the State of California, without giving
effect to principles of conflicts or choice of law. The
parties to this Agreement hereby submit to the exclusive
jurisdiction of any state court sitting in Los Angeles
County, California, or any federal court sitting in Los
Angeles, California, in any action or proceeding arising
out of or relating to this Agreement and waive, to the
fullest extent they may do so, the defense of
inconvenient forum to the maintenance of any such action
or proceeding.

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(Second Am. Compl., Ex. 3, at 11.)

According to KBS, the instant

action arises out of the Agreement, and therefore, the forumselection clause applies.
When jursidiction is based on diversity, as it is here, we
apply the forum state’s choice-of-law rules to determine the
applicable substantive law.

See Klaxon Co. v. Stentor Elec. Mfg.

Co., 313 U.S. 487, 496 (1941).

“Illinois respects a contract’s

choice-of-law clause as long as the contract is valid and the law
chosen is not contrary to Illinois’s fundamental public policy.”
Thomas v. Guardsmark, Inc., 381 F.3d 701, 705 (7th Cir. 2004).
Illinois

has

a

strong

public

policy,

reflected

in

the

Franchise Act, of protecting Illinois residents “who have suffered
substantial losses to franchisors.”

See Flynn Beverage Inc. v.

Joseph E. Seagram & Sons, Inc., 815 F. Supp. 1174, 1178 (C.D. Ill.
1993); 815 ILCS 705/2.

In pertinent part, the Act states: “Any

provision in a franchise agreement that designates jurisdiction or
venue in a forum outside of this State is void.”

815 ILCS 705/4.

KBS argues that this provision does not apply because “[u]nder
Illinois choice-of-law principles, even when a plaintiff alleges a
[Franchise Act] claim, if the contract has an express choice-of-law
and forum clause, then the chosen state’s law applies and the case
is transferred.”

(Def.’s Mot. to Dismiss at 7.)

KBS cites two

district court decisions for this proposition: Oakton Distributors,
Inc. v. U-Line Corp., No. 06 C 1353, 2006 WL 2714695 (N.D. Ill.

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Sept. 20, 2006), and Nardini v. Thrifty Rent-A-Car, Inc., No. 84 C
10233, 1987 WL 12166 (N.D. Ill. June 8, 1987).

In Oakton, the

court enforced a forum-selection clause in an alleged franchise
agreement, reasoning that “if the choice-of-law clause kicks in,
the [Franchise Act] never comes into play.”
*3.

2006 WL 2714695, at

In Nardini, the plaintiffs argued that the Franchise Act

rendered

unenforceable

a

specified

choice-of-law
that

Oklahoma

clause
law

in

would

a

license

agreement

that

govern

the

contract.

The court enforced the contract provision on the ground

that that the Franchise Act provision that voids a designation of
jurisdiction or venue in a forum outside of Illinois “says nothing
about choice of law.”

1987 WL 12166, at *3.

KBS fails to acknowledge Seventh Circuit case law to the
contrary.1

In Wright-Moore Corp. v. Ricoh Corp., 908 F.2d 128 (7th

Cir. 1990), the Court considered a similar issue involving Indiana
franchise law, which, the Court noted, is “almost identical” to
Illinois franchise law.

908 F.2d at 136.

The agreement in Wright-

Moore was between a New York franchisor and an Indiana franchisee
and contained a New York choice-of-law clause.

The Court agreed

with the district court that “enforcement of the choice of law
provision in the distributorship agreement would be contrary to
Indiana’s express public policy,” 908 F.2d at 132, and further
explained:

1/

Oakton did not discuss Wright-Moore, and Nardini preceded it.

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The public policy, articulated in the nonwaiver
provisions of the statute is clear: a franchisor, through
its superior bargaining power, should not be permitted to
force the franchisee to waive the legislatively provided
protections, whether directly through waiver provisions
or indirectly through choice of law. This public policy
is sufficient to render the choice to opt out of
Indiana’s franchise law one that cannot be made by
agreement.
Id.

The Court also found that Indiana had a materially greater

interest in the litigation than New York and held that Indiana
franchise law governed the case.
The Seventh Circuit’s reasoning in Wright-Moore applies here.
Illinois

has

a

strong

public

policy

of

protecting

Illinois

franchisees by overriding the Agreement’s choice-of-law provision,
and we concur with our colleagues who have relied on Wright-Moore
in holding that this public policy invalidates contractual choice
of law in the franchise context.

See Franklin’s Sys., Inc. v.

Infanti, 883 F. Supp. 246, 250-51 (N.D. Ill. 1995) (holding that
the Franchise Act applied notwithstanding the parties’ contractual
choice of Georgia law); Flynn, 815 F. Supp. at 1178 (applying

the

Franchise Act notwithstanding the parties’ contractual choice of
New York law); Hengel, Inc. v. Hot ‘N Now, Inc., 825 F. Supp. 1311,
1316-17

(N.D.

Ill.

1993)

(holding

that

the

Franchise

Act

“represents a fundamental policy” that invalidated contractual
choice of Michigan law); see also To-Am Equip. Co. v. Mitsubishi
Caterpillar Forklift Am., Inc., 152 F.3d 658, 662 (7th Cir. 1998)
(citing Hengel for the proposition that “Illinois, like many other

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states, has made it clear that parties cannot opt out of the
coverage of the Act for Illinois franchisees”).

The Franchise Act

thus overrides the California choice-of-law in the Agreement and
voids the forum-selection clause. KBS complains about Channel 28’s
“strategic decision” to bring a Franchise Act claim, Def.’s Mot. at
7, but at this stage of the proceedings, we are required to accept
the plaintiff’s version of events as true.

See Faulkenberg v. CB

Tax Franchise Sys., LP, 637 F.3d 801, 806 (7th Cir. 2011) (district
court was required to accept plaintiffs’ version of events as true,
including its allegation that the franchise agreement concerned a
franchise located in Illinois); Wright-Moore, 908 F.2d at 133
(applying the protections of Indiana franchise law while noting
that plaintiff was “potentially” a franchisee).
KBS argues that even if we do not enforce the forum-selection
clause, we should transfer this case to the Central District of
California pursuant to 28 U.S.C. § 1404(a).

Section 1404(a)

provides that “a district court may transfer any civil action to
any other district or division where it might have been brought”
for the convenience of parties and witnesses and in the interest of
justice.

KBS relies largely on the Agreement’s forum-selection

clause and choice of California law as the basis for transfer, but
we have found that the policy underlying the Illinois Franchise Act
invalidates the Agreement’s choice of law and forum.

Channel 28

has chosen this forum, and the Franchise Act prohibits it from

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contracting out of the Act’s protections.

KBS has failed to

persuade us that a discretionary transfer under § 1404(a) is
appropriate.
CONCLUSION
For the foregoing reasons, defendant KBS America, Inc.’s
motion to dismiss the Second Amended Complaint pursuant to Federal
Rule of Civil Procedure 12(b)(3) [68] is denied.

A status hearing

is set for April 18, 2012 at 11:00 a.m.

DATE:

March 29, 2012

ENTER:

_____________________________________________
John F. Grady, United States District Judge