Italian Franchisee Loses Lawsuit Brought Under The Laws Of . . . California?

Here's an interesting case I recently came across.  It features a franchisee based in Italy suing its California-based franchisor in California, alleging violations of California's franchise laws.

If you've ever bought a diamond ring, you are doubtlessly familiar with GIA, or the Gemological Institute of America, Inc. GIA, which was the defendant in the case, is a precious gem grading company with a principal place of business in Carlsbad, California. 

The plaintiffs were longtime employees of GIA who, in December 1991, entered into an employment agreement with the company to relocate to Vicenza, Italy to open what would be GIA’s first European location.  Plaintiffs did relocate from the U.S. to Italy in 1992, and opened and operated a gem grading school on behalf of GIA there.  GIA Italy became the hub of all of GIA’s activities in Europe, graduating around 60 gemologists per year. 

In 2007, GIA entered into an agreement with the Florence Chamber of Commerce to relocate GIA Italy to Florence and construct a GIA lab and gem drop-off service there.  In exchange, the Chamber would provide GIA Italy with substantial financial support. 

Later in 2007, GIA ended plaintiffs’ employment agreement and entered into a franchise agreement with them, giving them ownership of GIA Italy as franchisees.  The franchise agreement included the following provision:

3.6 No Gem Grading or Identification Services. Licensee, its affiliates, owners, managers, members, agents, and employees will not operate any trade-service laboratory for the purpose of diamond grading, colored stone grading, or gem identification, without the prior written consent of GIA in each instance.

In March 2011, GIA sent the Florence Chamber of Commerce a letter indicating that GIA would no longer allow the construction of the lab and drop-off facility in Florence.  Later that year, the Chamber informed the franchisees that it would no longer support GIA Italy because the Florence lab had not been opened despite the passage of several years. 

Plaintiffs filed suit, contending (among other things) that GIA had defrauded them into signing the franchise agreement based on its representations in 2007 that it would continue to support the Florence gem lab, which representations were false.   Plaintiffs argued that one of the key reasons they signed the franchise agreement was because of their understanding that they would be able to open the Florence lab (based on oral representations from GIA’s President).  Plaintiffs also claimed that GIA violated the California Franchise Investment Law (“CFIL”) (California Corporations Code §31119) by failing to provide them with a franchise disclosure document and register its franchise offering as required by law.

GIA moved to dismiss. As to the fraud claim, GIA contended that plaintiffs could not claim reliance on GIA’s representations as to the Florence gem lab because (based on the above-quoted language) the franchise agreement expressly prohibited plaintiffs from operating a lab or drop-off location without GIA’s prior written consent.  The Court agreed with GIA, holding that “it is not plausible for Plaintiffs to have reasonably relied on any prior representations of continued support for such a laboratory when they signed the License Agreement.”

As to the CFIL claim, GIA argued that: (a) the law did not apply to extraterritorial franchise sales; and (b) the claim was not brought within the four year statutory limitations period as required by California Corporations Code §31303. Plaintiffs countered by arguing that GIA Italy’s student enrollment included students from the U.S. and California, and that the statute of limitations had not expired because the claim was brought within one year of their discovery of GIA’s breach.

The Court dismissed the CFIL claim, finding that the statutory limitations period had expired.  In support of this, the Court considered the language of California Corporations Code §31303, which provides:

No action shall be maintained to enforce any liability created under Section 31300 unless brought before the expiration of four years after the act or transaction constituting the violation, [or] the expiration of one year after the discovery by the plaintiff of the fact constituting the violation… whichever shall first expire.

The Court held that the CFIL’s four-year limitations period is an absolute bar, and that belated discovery cannot serve to extend the statute (citing People ex rel. Dep't of Corps. v. Speedee Oil Change Systems, Inc., 95 Cal.App.4th 709, 727, 116 Cal.Rptr.2d 497 (Cal.Ct.App.2002).  Because plaintiffs’ complaint was brought over four years and five months after the franchise agreement was signed, the Court dismissed their CFIL claim.  As a result, the Court did not reach the issue of whether the CFIL applied to the transaction.

The moral of the story: be aware of statutes of limitation and how they work.  Don't assume that a provision tolling the statute from the date of "discovery" trumps all other time periods in the statute.  Also, if you're a franchisee, don't assume that the franchise laws of your franchisor's home state will apply to you if you're not also based in that state.  Non molto bene for the franchisee!

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