The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge
Plaintiffs Bridge Fund Capital Corporation ("Bridge Fund") and Big Bad 1, LLC ("Big Bad") (hereinafter collectively referred to as "Plaintiffs") seek monetary and injunctive relief against Defendants FastBucks Franchise Corporation ("FastBucks"), Charles Horton, ("Horton"), and Does 1-50 (hereinafter collectively referred to as "Defendants"), arising out of a dispute regarding payday loan and check cashing franchises operated by Plaintiffs in California.
Presently before the Court is Defendants' Motion to Dismiss under Federal Rules of Civil Procedure 12(b)(1)*fn1 and 12(b)(6), or alternatively, to Stay the Action pending Arbitration. Defendants' Motion alleges that Plaintiffs are bound to submit their claims to arbitration in Texas pursuant to their respective franchise agreements with FastBucks. Thus, according to Defendants, this Court does not have jurisdiction to hear Plaintiffs' claims. For the reasons set forth below, Defendants' Motion to Dismiss or Stay the Action is DENIED.*fn2
In 2006, each Plaintiff executed separate franchise agreements with FastBucks for the operation of payday loan and check cashing franchises within California. Bridge Fund operates its franchise in Montclair, California, and Big Bad operates its franchise in Stockton, California. FastBucks is a Nevada Corporation with its principal place of business in Texas. Horton was, at all relevant times herein, the Chief Executive Officer of FastBucks and a member of its Board of Directors.
Plaintiffs allege that Horton's ownership of the vast majority of FastBucks' common and preferred stock constitutes a joint enterprise between Defendants.
Plaintiffs assert that FastBucks has been offering payday lending franchises via franchise agreements, a written Uniform Franchise Offering Circular ("UFOC"), a website, and other materials, since at least 2003. Further, Plaintiffs allege that Horton was and is actively involved in the marketing of FastBucks franchises to Plaintiffs and others. FastBucks' franchise marketing allegedly included representations of a unique system with substantial forms and training, a manual for the business system, and forms and collections materials for loans which were proper for use in California.
Plaintiffs' respective franchise agreements with FastBucks each contain an arbitration provision requiring all disputes arising between the parties to be resolved through arbitration primarily under the rules of the American Arbitration Association ("AAA"). These franchise agreements also contained choice of law and choice of forum provisions requiring any dispute to take place in Texas in accordance with Texas law.
Plaintiffs received UFOCs from FastBucks in conjunction with the franchise agreements. These UFOCs contained an addendum pertaining to the enforcement of the franchise agreements under California law ("California Appendix"). Plaintiffs claim that the California Appendix modifies the franchise agreements so that they are in compliance with California law, and this compliance requires Plaintiffs' disputes with Defendants to be resolved in California in accordance with California law.
Further, Plaintiffs claim that the arbitration provisions included in the franchise agreements are unenforceable as they are both procedurally and substantively unconscionable under California law. Plf's Mem. in Opp. to Def's Mot. at 9-20.
On February 28, 2008, Plaintiffs filed their Complaint in state court alleging breach of written franchise contracts, fraud and deceit, negligent misrepresentation, violation of the California Franchise Investment Law ("CFIL"), and unfair trade practices under the California Business and Professions Code § 17200. Plaintiffs seek damages, declaratory relief, and injunctive relief including the rescission of the franchise agreements. Plaintiffs allege Defendants made material misrepresentations and omissions regarding Defendants' franchises. Specifically, Plaintiffs allege that FastBucks has no proven franchise system, no business manual, and provided little training and forms improper for use in California. Plaintiffs allege they learned of the franchise system's non-compliance with California law only after an inspection by the State of California.
On April 9, 2008, Defendants successfully removed the action to this Court under diversity jurisdiction.
On May 30, 2008, Defendants filed this Motion to Dismiss under Rules 12(b)(1) and 12(b)(6), or alternatively, to Stay the Action pending Arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. § 3 ("FAA").
Defendants allege that arbitration, in Texas, under Texas law, is the required dispute resolution forum for Plaintiffs' claims, pursuant to their respective franchise agreements with FastBucks. They urge the Court to dismiss this action on that basis.
A. Motion to Dismiss - 12(b)(1)
In moving to dismiss for lack of subject-matter jurisdiction pursuant to Rule 12(b)(1), the challenging party may either make a "facial attack" on the allegations of jurisdiction contained in the complaint or can instead take issue with subject-matter jurisdiction on a factual basis ("factual attack"). Thornhill Publ'g Co. v. General Tel. & Elect. Corp., 594 F.2d 730, 733 (9th Cir. 1979); Mortensen v. First Fed. Sav. & Loan Ass'n, 549 F.2d 884, 891 (3d Cir. 1977). If the motion constitutes a factual attack, "no presumptive truthfulness attaches to plaintiff's allegations, and the existence of disputed material facts will not preclude the trial court from evaluating for itself the merits of jurisdictional claims." Thornhill, 594 F.2d at 733 (quoting Mortensen, 549 F.2d at 891). When resolving a factual attack, the court "may review evidence beyond the complaint without converting the motion to dismiss into a motion for summary judgment." Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004).
B. Motion to Dismiss - 12(b)(6)
On a motion to dismiss for failure to state a claim under Rule 12(b)(6), all allegations of material fact must be accepted as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Rule 8(a)(2) requires only "a short and plain statement of the claim showing that the pleader is entitled to relief," in order to "give the defendant fair notice of what the... claim is and the grounds upon which it rests." Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed. 2d 80 (1957). While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the "grounds" of his "entitlement to relief" requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1964-65 (2007) (internal citations and quotations omitted). Factual allegations must be enough to raise a right to relief above the speculative level. Id. at 1965 (citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-236 (3d ed. 2004) ("The pleading must contain something more... than... a statement of facts that merely creates a suspicion [of] a legally cognizable right of action").
If the court grants a motion to dismiss a complaint, it must then decide whether to grant leave to amend. The court should "freely give" leave to amend when there is no "undue delay, bad faith[,] dilatory motive on the part of the movant... undue prejudice to the opposing party by virtue of... the amendment, [or] futility of the amendment...." Fed. R. Civ. P. 15(a); Foman v. Davis, 371 U.S. 178, 182 (1962). Generally, leave to amend is only denied when it is clear that the deficiencies of the complaint cannot be cured by amendment. DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992).
A. Choices of Law and Forum
"Federal Courts sitting in diversity must apply 'the forum state's choice of law rules to determine the controlling substantive law.'" Fields v. Legacy Health Sys., 413 F.3d 943, 950 (9th Cir. 2005) (quoting Patton v. Cox, 276 F.3d 493, 495 (9th Cir. 2002)). In the instant case, Plaintiffs filed their complaint in California, therefore California's choice-of-law rules apply.
California courts have evidenced a strong policy in favor of the enforcement of choice of law provisions. Omstead v. Dell, Inc., 473 F. Supp. 2d 1018, 1023 (N.D. Cal. 2007). Further, "where both a forum-selection clause and a choice-of-law clause are at issue, the question of the enforceability of the forum-selection clause is 'inextricably bound up' in the question of the validity of the ...