COURT WATCH

There was no dispute that their link was a link to a legitimate Web site at the time that the franchisees put the link on their Web site. The court found that when the owners of the legitimate site went out of business, the site was taken over at some unknown time by the pornography distributor. But there was no evidence, according to the court, that the franchisees were involved in the pornography site or even knew that their Web site was linked to a pornography site. It was also undisputed that the franchisees removed the link to the pornography site as soon as it was reported to them by Voice-Tel.

Furthermore, the court found, Voice-Tel produced no evidence of actual impairment of its mark and no evidence that anyone associated the Voice-Tel marks with pornography as a result of what the court called 'the hijacking' of the franchisees' Web site. The court noted that Voice-Tel did not offer any consumer surveys or statistics showing that there was any harm whatsoever to the mark based on the link on the franchisees' Web site.

Without putting forth any evidence, Voice-tel failed to meet its evidentiary burden, the court ruled. Therefore, the court held that there was no genuine issue of material fact as to whether Voice-Tel's mark was materially impaired by the franchisees and granted their motion for summary judgment as to whether their franchise agreements could be terminated based on material impairment of the mark.

Voice-Tel also claimed that the franchisees diluted or 'tarnished' its mark by associating it with pornography, in violation of the anti-dilution provisions of the Lanham Act. The franchisees cited two cases as support for their position that, as a matter of law, 'tarnishment' does not exist when a Web site displaying a trademark is linked to a second Web site, regardless of how offensive that second site might be. The court agreed that to extend a claim for trademark dilution or tarnishment to a hyperlink situation would give the trademark owner far more protection than the Lanham Act intended and granted the franchisees' motion for summary judgment as to the claim under that statute.

Voice-Tel sought an injunction barring the franchisees from using the Voice-Tel marks, on the grounds that Internet archive sites continue to allow users to link to the offensive third-party site from the archived version of the franchisees' site. The court noted, however, that this injunction would have no effect on any archived Web sites because they are operated by third parties who would not be affected by the injunction. Therefore, the relief requested would not cure the effects of the alleged harm, and Voice-Tel could not demonstrate a likelihood of success on the merits or irreparable injury, the court ruled. The court also held that the scope of the relief sought by Voice-Tel was patently overbroad, finding that, at most, the franchisees should be barred from linking the Voice-Tel trademark to 'adult materials,' not from using the Voice-Tel trademark altogether.

Franchisee Compelled to Arbitrate Fraud and Conspiracy Claims Against Franchisor

The U.S. Court of Appeals for the Third Circuit recently reversed the decision of the U.S. District Court for the Middle District of Pennsylvania and held that a franchisee was required to arbitrate his claims against the franchisor pursuant to the franchise agreement's arbitration provision. Shaffer v. Minuteman Press International, Inc., et al., 2003 WL 21513231 (3d Cir. 2003).

Michael Shaffer, a former Minuteman Press franchisee in Pennsylvania, brought an action against Minuteman Press International and others alleging negligence, fraud, fraudulent misrepresentation, civil conspiracy, emotional distress, as well as seeking declaratory relief.

Shaffer entered into a franchise agreement with Minuteman Press in September 2000. Shaffer alleged that shortly after he entered into the franchise agreement, the business failed to perform as the defendants had promised. He then filed a claim against the defendants alleging, among other things, that the defendants conspired to fraudulently induce him to purchase an existing Minuteman Press franchise.

Minuteman Press filed a motion to dismiss the claims raised or, in the alternative, to stay the proceedings pending arbitration based upon the arbitration provision contained in the franchise agreement. The district court denied the motion to dismiss and refused to enforce the arbitration agreement.

Minuteman Press appealed. On appeal, Shaffer claimed that the arbitration clause was unenforceable because the franchise agreement (and its arbitration provision) was a contract of adhesion, as he had no bargaining power when he entered into the contract. The contract was dictated on a 'take it or leave it' basis and the arbitration agreement was required of all those who wanted to purchase a franchise. Minuteman Press argued, on the other hand, that the district court erred in not staying the proceedings pending arbitration, especially in light of the strong federal policy in favor of enforcement of arbitration agreements.

The Third Circuit Court of Appeals agreed with the defendants and reversed the district court's decision. It held that regardless of whether Shaffer presented a 'valid cause of action' based on his allegation that the franchise agreement was a contract of adhesion, the Federal Arbitration Act still governed and the court should have stayed the matter pending arbitration. The appellate court further observed that it was not aware of any relevant cases where a court has found that a franchise agreement is a contract of adhesion, which it defined as an agreement that is unconscionable or oppressive, unreasonably favoring one party over another. Because the appellate court saw no evidence of unequal bargaining power or unconscionability in the record to support the district court's conclusion that Shaffer's allegations sufficiently stated a cause of action, and because there is a strong presumption in favor of enforcement of arbitration agreements, the appellate court reversed the district court and held that Shaffer's claims were arbitrable.

Franchisee's Class Action Suit is Arbitrable

The California Court of Appeal, Second Appellate District, recently held that a Direct TV dealer could pursue claims against the franchisor on his own behalf and on behalf of others similarly situated in a class action before the American Arbitration Association. Garcia, et al. v. Direct TV, Inc., et al., CCH Bus. Fran. Guide ' 12,569 (Cal. Ct. App., 2d Dist. 2002).

Robert Garcia, a Direct TV dealer, filed a class action demand for arbitration with the American Arbitration Association alleging fraud, breach of contract, and tortious interference with contractual relations. The Demand for Arbitration was later amended to include 14 additional complaining dealers. Later in the same year, Garcia filed a lawsuit against Direct TV and its parent corporation.

The gravamen of the dealers' claims was that Direct TV failed to pay earned commissions and other compensation due to the dealers. The plaintiffs argued that there were common issues in all cases and that a national class of dealers who have acquired subscribers for Direct TV's services within the last four years should be certified.

Direct TV moved to dismiss the lawsuit and, in the alternative, to compel arbitration. The court granted Direct TV's motion to compel arbitration. However, it rejected Direct TV's contention that class-wide arbitration was prohibited by the terms of the dealers' agreements, which provide for the resolution of all disputes by arbitration governed by the Federal Arbitration Act (FAA). Specifically, the court held that it, not the arbitrator, would have to determine the procedural class action issues (ie, whether the class should be certified), but that the merits of the underlying dispute should be decided by the arbitrator pursuant to the dealers' agreements with Direct TV.

Direct TV appealed the trial court's decision. On appeal, Direct TV argued that the parties agreed to be bound by the FAA, and not California state law, and that a class arbitration is not permitted by the FAA. The appellate court disagreed with Direct TV. It held that under California law, class-wide arbitration is permissible and California courts have the authority to order class-wide arbitration. Critically, the court observed that the notion of class-wide arbitration is entirely consistent with the 'letter and spirit of the FAA.' Therefore, the court held that so long as the trial court decided the issues relating to class certification, the class action could proceed in arbitration.

California Forum Selection Clause Enforceable

The Texas Court of Appeals has affirmed the decision of a trial court dismissing a franchisee's claim against the franchisor based upon forum selection clauses in four franchise agreements, which required the parties to litigate all claims in federal or state court located in San Francisco. My Caf'-CCC, Ltd., et al. v. Lunch Stop, Inc., __ S.W. 3d __, 2003 WL 21398304 (Tx. App. – Dallas 2003).

My Caf' executed four franchise agreements with Lunch Stop. Prior to entering into each franchise agreement, My Caf' received a franchise offering circular which advised My Caf' that the franchise agreement permitted the franchisee to sue only in San Francisco. In addition, each franchise agreement specifically provided that any dispute arising under or in connection with it and any claim affecting its validity, construction, effect, performance, or termination would be resolved exclusively by the federal or state courts in San Francisco.

Despite the forum selection provisions in the franchise agreements, My Caf' sued Lunch Stop in Dallas seeking to recover damages based on fraudulent inducement and breach of contract. My Caf' alleged that the forum selection clauses in the franchise agreements were unenforceable for two reasons ' because they did not comply with the Texas Business and Commerce Code and because they were procured by fraud. Lunch Stop argued, on the other hand, that the forum selection provisions were indeed enforceable and that the Dallas litigation should therefore be dismissed. The trial court agreed with Lunch Stop and granted its motion to dismiss 'because of a contractual forum selection requirement to litigate in California.' My Caf' appealed.

The appellate court agreed with the trial court and held that the forum selection provisions in the franchise agreements were enforceable. Specifically, the court found that since the forum selection clauses were disclosed in each offering circular, the Texas Business and Commerce Code ' 41,104(b)(8), which prohibits the application of forum selection clauses under certain limited circumstances, did not apply. Instead, the court observed that forum selection clauses are routinely enforced in Texas, provided that the parties have contractually consented to submit to the exclusive jurisdiction of another state and the other state recognizes the validity of such provisions. Interestingly, the franchisee never argued that California may not recognize the validity of such provisions (at least in the franchise context).

The court also found that because the forum selection clause encompassed all causes of action concerning the contract, the claim that My Caf' was fraudulently induced to enter into the contract could not void the forum selection clause. Therefore, the appellate court affirmed the trial court's decision to dismiss the case.

The U.S. Court of Appeals for the Third Circuit recently reversed the decision of the U.S. District Court for the Middle District of Pennsylvania and held that a franchisee was required to arbitrate his claims against the franchisor pursuant to the franchise agreement's arbitration provision. Shaffer v. Minuteman Press International, Inc., et al., 2003 WL 21513231 (3d Cir. 2003).

Michael Shaffer, a former Minuteman Press franchisee in Pennsylvania, brought an action against Minuteman Press International and others alleging negligence, fraud, fraudulent misrepresentation, civil conspiracy, emotional distress, as well as seeking declaratory relief.

Shaffer entered into a franchise agreement with Minuteman Press in September 2000. Shaffer alleged that shortly after he entered into the franchise agreement, the business failed to perform as the defendants had promised. He then filed a claim against the defendants alleging, among other things, that the defendants conspired to fraudulently induce him to purchase an existing Minuteman Press franchise.

Minuteman Press filed a motion to dismiss the claims raised or, in the alternative, to stay the proceedings pending arbitration based upon the arbitration provision contained in the franchise agreement. The district court denied the motion to dismiss and refused to enforce the arbitration agreement.

Minuteman Press appealed. On appeal, Shaffer claimed that the arbitration clause was unenforceable because the franchise agreement (and its arbitration provision) was a contract of adhesion, as he had no bargaining power when he entered into the contract. The contract was dictated on a 'take it or leave it' basis and the arbitration agreement was required of all those who wanted to purchase a franchise. Minuteman Press argued, on the other hand, that the district court erred in not staying the proceedings pending arbitration, especially in light of the strong federal policy in favor of enforcement of arbitration agreements.

The Third Circuit Court of Appeals agreed with the defendants and reversed the district court's decision. It held that regardless of whether Shaffer presented a 'valid cause of action' based on his allegation that the franchise agreement was a contract of adhesion, the Federal Arbitration Act still governed and the court should have stayed the matter pending arbitration. The appellate court further observed that it was not aware of any relevant cases where a court has found that a franchise agreement is a contract of adhesion, which it defined as an agreement that is unconscionable or oppressive, unreasonably favoring one party over another. Because the appellate court saw no evidence of unequal bargaining power or unconscionability in the record to support the district court's conclusion that Shaffer's allegations sufficiently stated a cause of action, and because there is a strong presumption in favor of enforcement of arbitration agreements, the appellate court reversed the district court and held that Shaffer's claims were arbitrable.

The California Court of Appeal, Second Appellate District, recently held that a Direct TV dealer could pursue claims against the franchisor on his own behalf and on behalf of others similarly situated in a class action before the American Arbitration Association. Garcia, et al. v. Direct TV, Inc., et al., CCH Bus. Fran. Guide ' 12,569 (Cal. Ct. App., 2d Dist. 2002).

Robert Garcia, a Direct TV dealer, filed a class action demand for arbitration with the American Arbitration Association alleging fraud, breach of contract, and tortious interference with contractual relations. The Demand for Arbitration was later amended to include 14 additional complaining dealers. Later in the same year, Garcia filed a lawsuit against Direct TV and its parent corporation.

The gravamen of the dealers' claims was that Direct TV failed to pay earned commissions and other compensation due to the dealers. The plaintiffs argued that there were common issues in all cases and that a national class of dealers who have acquired subscribers for Direct TV's services within the last four years should be certified.

Direct TV moved to dismiss the lawsuit and, in the alternative, to compel arbitration. The court granted Direct TV's motion to compel arbitration. However, it rejected Direct TV's contention that class-wide arbitration was prohibited by the terms of the dealers' agreements, which provide for the resolution of all disputes by arbitration governed by the Federal Arbitration Act (FAA). Specifically, the court held that it, not the arbitrator, would have to determine the procedural class action issues (ie, whether the class should be certified), but that the merits of the underlying dispute should be decided by the arbitrator pursuant to the dealers' agreements with Direct TV.

Direct TV appealed the trial court's decision. On appeal, Direct TV argued that the parties agreed to be bound by the FAA, and not California state law, and that a class arbitration is not permitted by the FAA. The appellate court disagreed with Direct TV. It held that under California law, class-wide arbitration is permissible and California courts have the authority to order class-wide arbitration. Critically, the court observed that the notion of class-wide arbitration is entirely consistent with the 'letter and spirit of the FAA.' Therefore, the court held that so long as the trial court decided the issues relating to class certification, the class action could proceed in arbitration.

The Texas Court of Appeals has affirmed the decision of a trial court dismissing a franchisee's claim against the franchisor based upon forum selection clauses in four franchise agreements, which required the parties to litigate all claims in federal or state court located in San Francisco. My Caf'-CCC, Ltd., et al. v. Lunch Stop, Inc., __ S.W. 3d __, 2003 WL 21398304 (Tx. App. – Dallas 2003).

My Caf' executed four franchise agreements with Lunch Stop. Prior to entering into each franchise agreement, My Caf' received a franchise offering circular which advised My Caf' that the franchise agreement permitted the franchisee to sue only in San Francisco. In addition, each franchise agreement specifically provided that any dispute arising under or in connection with it and any claim affecting its validity, construction, effect, performance, or termination would be resolved exclusively by the federal or state courts in San Francisco.

Despite the forum selection provisions in the franchise agreements, My Caf' sued Lunch Stop in Dallas seeking to recover damages based on fraudulent inducement and breach of contract. My Caf' alleged that the forum selection clauses in the franchise agreements were unenforceable for two reasons ' because they did not comply with the Texas Business and Commerce Code and because they were procured by fraud. Lunch Stop argued, on the other hand, that the forum selection provisions were indeed enforceable and that the Dallas litigation should therefore be dismissed. The trial court agreed with Lunch Stop and granted its motion to dismiss 'because of a contractual forum selection requirement to litigate in California.' My Caf' appealed.

The appellate court agreed with the trial court and held that the forum selection provisions in the franchise agreements were enforceable. Specifically, the court found that since the forum selection clauses were disclosed in each offering circular, the Texas Business and Commerce Code ' 41,104(b)(8), which prohibits the application of forum selection clauses under certain limited circumstances, did not apply. Instead, the court observed that forum selection clauses are routinely enforced in Texas, provided that the parties have contractually consented to submit to the exclusive jurisdiction of another state and the other state recognizes the validity of such provisions. Interestingly, the franchisee never argued that California may not recognize the validity of such provisions (at least in the franchise context).

The court also found that because the forum selection clause encompassed all causes of action concerning the contract, the claim that My Caf' was fraudulently induced to enter into the contract could not void the forum selection clause. Therefore, the appellate court affirmed the trial court's decision to dismiss the case.

Franchisees' Link to Pornographic Site Not Grounds for Termination

The U.S. District Court for the Northern District of Florida has granted a motion for summary judgment brought by two franchisees against their franchisor's claim that they committed breach of contract because their Web site linked to a site with hardcore pornography and gambling materials. The court also refused to enjoin the franchisees from using the franchisor's marks. Voice-Tel Enterprises, Inc. v. Joba, Inc., F.Supp. 2d, CCH Bus. Fran. Guide Par. 12,564 (N.D.Ga. 2003).

Voice-Tel, a messaging service franchisor, began the action by seeking a declaratory judgment that it was entitled to terminate the franchisees' franchise agreements and equitable relief to enjoin the franchisees from using the Voice-Tel marks. The parties subsequently added many other claims and counterclaims, but this summary will be limited to the rulings concerning the franchisees' Web site.

There was no dispute that their link was a link to a legitimate Web site at the time that the franchisees put the link on their Web site. The court found that when the owners of the legitimate site went out of business, the site was taken over at some unknown time by the pornography distributor. But there was no evidence, according to the court, that the franchisees were involved in the pornography site or even knew that their Web site was linked to a pornography site. It was also undisputed that the franchisees removed the link to the pornography site as soon as it was reported to them by Voice-Tel.

Furthermore, the court found, Voice-Tel produced no evidence of actual impairment of its mark and no evidence that anyone associated the Voice-Tel marks with pornography as a result of what the court called 'the hijacking' of the franchisees' Web site. The court noted that Voice-Tel did not offer any consumer surveys or statistics showing that there was any harm whatsoever to the mark based on the link on the franchisees' Web site.

Without putting forth any evidence, Voice-tel failed to meet its evidentiary burden, the court ruled. Therefore, the court held that there was no genuine issue of material fact as to whether Voice-Tel's mark was materially impaired by the franchisees and granted their motion for summary judgment as to whether their franchise agreements could be terminated based on material impairment of the mark.

Voice-Tel also claimed that the franchisees diluted or 'tarnished' its mark by associating it with pornography, in violation of the anti-dilution provisions of the Lanham Act. The franchisees cited two cases as support for their position that, as a matter of law, 'tarnishment' does not exist when a Web site displaying a trademark is linked to a second Web site, regardless of how offensive that second site might be. The court agreed that to extend a claim for trademark dilution or tarnishment to a hyperlink situation would give the trademark owner far more protection than the Lanham Act intended and granted the franchisees' motion for summary judgment as to the claim under that statute.

Voice-Tel sought an injunction barring the franchisees from using the Voice-Tel marks, on the grounds that Internet archive sites continue to allow users to link to the offensive third-party site from the archived version of the franchisees' site. The court noted, however, that this injunction would have no effect on any archived Web sites because they are operated by third parties who would not be affected by the injunction. Therefore, the relief requested would not cure the effects of the alleged harm, and Voice-Tel could not demonstrate a likelihood of success on the merits or irreparable injury, the court ruled. The court also held that the scope of the relief sought by Voice-Tel was patently overbroad, finding that, at most, the franchisees should be barred from linking the Voice-Tel trademark to 'adult materials,' not from using the Voice-Tel trademark altogether.

Franchisee Compelled to Arbitrate Fraud and Conspiracy Claims Against Franchisor

The U.S. Court of Appeals for the Third Circuit recently reversed the decision of the U.S. District Court for the Middle District of Pennsylvania and held that a franchisee was required to arbitrate his claims against the franchisor pursuant to the franchise agreement's arbitration provision. Shaffer v. Minuteman Press International, Inc., et al., 2003 WL 21513231 (3d Cir. 2003).

Michael Shaffer, a former Minuteman Press franchisee in Pennsylvania, brought an action against Minuteman Press International and others alleging negligence, fraud, fraudulent misrepresentation, civil conspiracy, emotional distress, as well as seeking declaratory relief.

Shaffer entered into a franchise agreement with Minuteman Press in September 2000. Shaffer alleged that shortly after he entered into the franchise agreement, the business failed to perform as the defendants had promised. He then filed a claim against the defendants alleging, among other things, that the defendants conspired to fraudulently induce him to purchase an existing Minuteman Press franchise.

Minuteman Press filed a motion to dismiss the claims raised or, in the alternative, to stay the proceedings pending arbitration based upon the arbitration provision contained in the franchise agreement. The district court denied the motion to dismiss and refused to enforce the arbitration agreement.

Minuteman Press appealed. On appeal, Shaffer claimed that the arbitration clause was unenforceable because the franchise agreement (and its arbitration provision) was a contract of adhesion, as he had no bargaining power when he entered into the contract. The contract was dictated on a 'take it or leave it' basis and the arbitration agreement was required of all those who wanted to purchase a franchise. Minuteman Press argued, on the other hand, that the district court erred in not staying the proceedings pending arbitration, especially in light of the strong federal policy in favor of enforcement of arbitration agreements.

The Third Circuit Court of Appeals agreed with the defendants and reversed the district court's decision. It held that regardless of whether Shaffer presented a 'valid cause of action' based on his allegation that the franchise agreement was a contract of adhesion, the Federal Arbitration Act still governed and the court should have stayed the matter pending arbitration. The appellate court further observed that it was not aware of any relevant cases where a court has found that a franchise agreement is a contract of adhesion, which it defined as an agreement that is unconscionable or oppressive, unreasonably favoring one party over another. Because the appellate court saw no evidence of unequal bargaining power or unconscionability in the record to support the district court's conclusion that Shaffer's allegations sufficiently stated a cause of action, and because there is a strong presumption in favor of enforcement of arbitration agreements, the appellate court reversed the district court and held that Shaffer's claims were arbitrable.

Franchisee's Class Action Suit is Arbitrable

The California Court of Appeal, Second Appellate District, recently held that a Direct TV dealer could pursue claims against the franchisor on his own behalf and on behalf of others similarly situated in a class action before the American Arbitration Association. Garcia, et al. v. Direct TV, Inc., et al., CCH Bus. Fran. Guide ' 12,569 (Cal. Ct. App., 2d Dist. 2002).

Robert Garcia, a Direct TV dealer, filed a class action demand for arbitration with the American Arbitration Association alleging fraud, breach of contract, and tortious interference with contractual relations. The Demand for Arbitration was later amended to include 14 additional complaining dealers. Later in the same year, Garcia filed a lawsuit against Direct TV and its parent corporation.

The gravamen of the dealers' claims was that Direct TV failed to pay earned commissions and other compensation due to the dealers. The plaintiffs argued that there were common issues in all cases and that a national class of dealers who have acquired subscribers for Direct TV's services within the last four years should be certified.

Direct TV moved to dismiss the lawsuit and, in the alternative, to compel arbitration. The court granted Direct TV's motion to compel arbitration. However, it rejected Direct TV's contention that class-wide arbitration was prohibited by the terms of the dealers' agreements, which provide for the resolution of all disputes by arbitration governed by the Federal Arbitration Act (FAA). Specifically, the court held that it, not the arbitrator, would have to determine the procedural class action issues (ie, whether the class should be certified), but that the merits of the underlying dispute should be decided by the arbitrator pursuant to the dealers' agreements with Direct TV.

Direct TV appealed the trial court's decision. On appeal, Direct TV argued that the parties agreed to be bound by the FAA, and not California state law, and that a class arbitration is not permitted by the FAA. The appellate court disagreed with Direct TV. It held that under California law, class-wide arbitration is permissible and California courts have the authority to order class-wide arbitration. Critically, the court observed that the notion of class-wide arbitration is entirely consistent with the 'letter and spirit of the FAA.' Therefore, the court held that so long as the trial court decided the issues relating to class certification, the class action could proceed in arbitration.

California Forum Selection Clause Enforceable

The Texas Court of Appeals has affirmed the decision of a trial court dismissing a franchisee's claim against the franchisor based upon forum selection clauses in four franchise agreements, which required the parties to litigate all claims in federal or state court located in San Francisco. My Caf'-CCC, Ltd., et al. v. Lunch Stop, Inc., __ S.W. 3d __, 2003 WL 21398304 (Tx. App. – Dallas 2003).

My Caf' executed four franchise agreements with Lunch Stop. Prior to entering into each franchise agreement, My Caf' received a franchise offering circular which advised My Caf' that the franchise agreement permitted the franchisee to sue only in San Francisco. In addition, each franchise agreement specifically provided that any dispute arising under or in connection with it and any claim affecting its validity, construction, effect, performance, or termination would be resolved exclusively by the federal or state courts in San Francisco.

Despite the forum selection provisions in the franchise agreements, My Caf' sued Lunch Stop in Dallas seeking to recover damages based on fraudulent inducement and breach of contract. My Caf' alleged that the forum selection clauses in the franchise agreements were unenforceable for two reasons ' because they did not comply with the Texas Business and Commerce Code and because they were procured by fraud. Lunch Stop argued, on the other hand, that the forum selection provisions were indeed enforceable and that the Dallas litigation should therefore be dismissed. The trial court agreed with Lunch Stop and granted its motion to dismiss 'because of a contractual forum selection requirement to litigate in California.' My Caf' appealed.

The appellate court agreed with the trial court and held that the forum selection provisions in the franchise agreements were enforceable. Specifically, the court found that since the forum selection clauses were disclosed in each offering circular, the Texas Business and Commerce Code ' 41,104(b)(8), which prohibits the application of forum selection clauses under certain limited circumstances, did not apply. Instead, the court observed that forum selection clauses are routinely enforced in Texas, provided that the parties have contractually consented to submit to the exclusive jurisdiction of another state and the other state recognizes the validity of such provisions. Interestingly, the franchisee never argued that California may not recognize the validity of such provisions (at least in the franchise context).

The court also found that because the forum selection clause encompassed all causes of action concerning the contract, the claim that My Caf' was fraudulently induced to enter into the contract could not void the forum selection clause. Therefore, the appellate court affirmed the trial court's decision to dismiss the case.

The U.S. Court of Appeals for the Third Circuit recently reversed the decision of the U.S. District Court for the Middle District of Pennsylvania and held that a franchisee was required to arbitrate his claims against the franchisor pursuant to the franchise agreement's arbitration provision. Shaffer v. Minuteman Press International, Inc., et al., 2003 WL 21513231 (3d Cir. 2003).

Michael Shaffer, a former Minuteman Press franchisee in Pennsylvania, brought an action against Minuteman Press International and others alleging negligence, fraud, fraudulent misrepresentation, civil conspiracy, emotional distress, as well as seeking declaratory relief.

Shaffer entered into a franchise agreement with Minuteman Press in September 2000. Shaffer alleged that shortly after he entered into the franchise agreement, the business failed to perform as the defendants had promised. He then filed a claim against the defendants alleging, among other things, that the defendants conspired to fraudulently induce him to purchase an existing Minuteman Press franchise.

Minuteman Press filed a motion to dismiss the claims raised or, in the alternative, to stay the proceedings pending arbitration based upon the arbitration provision contained in the franchise agreement. The district court denied the motion to dismiss and refused to enforce the arbitration agreement.

Minuteman Press appealed. On appeal, Shaffer claimed that the arbitration clause was unenforceable because the franchise agreement (and its arbitration provision) was a contract of adhesion, as he had no bargaining power when he entered into the contract. The contract was dictated on a 'take it or leave it' basis and the arbitration agreement was required of all those who wanted to purchase a franchise. Minuteman Press argued, on the other hand, that the district court erred in not staying the proceedings pending arbitration, especially in light of the strong federal policy in favor of enforcement of arbitration agreements.

The Third Circuit Court of Appeals agreed with the defendants and reversed the district court's decision. It held that regardless of whether Shaffer presented a 'valid cause of action' based on his allegation that the franchise agreement was a contract of adhesion, the Federal Arbitration Act still governed and the court should have stayed the matter pending arbitration. The appellate court further observed that it was not aware of any relevant cases where a court has found that a franchise agreement is a contract of adhesion, which it defined as an agreement that is unconscionable or oppressive, unreasonably favoring one party over another. Because the appellate court saw no evidence of unequal bargaining power or unconscionability in the record to support the district court's conclusion that Shaffer's allegations sufficiently stated a cause of action, and because there is a strong presumption in favor of enforcement of arbitration agreements, the appellate court reversed the district court and held that Shaffer's claims were arbitrable.

The California Court of Appeal, Second Appellate District, recently held that a Direct TV dealer could pursue claims against the franchisor on his own behalf and on behalf of others similarly situated in a class action before the American Arbitration Association. Garcia, et al. v. Direct TV, Inc., et al., CCH Bus. Fran. Guide ' 12,569 (Cal. Ct. App., 2d Dist. 2002).

Robert Garcia, a Direct TV dealer, filed a class action demand for arbitration with the American Arbitration Association alleging fraud, breach of contract, and tortious interference with contractual relations. The Demand for Arbitration was later amended to include 14 additional complaining dealers. Later in the same year, Garcia filed a lawsuit against Direct TV and its parent corporation.

The gravamen of the dealers' claims was that Direct TV failed to pay earned commissions and other compensation due to the dealers. The plaintiffs argued that there were common issues in all cases and that a national class of dealers who have acquired subscribers for Direct TV's services within the last four years should be certified.

Direct TV moved to dismiss the lawsuit and, in the alternative, to compel arbitration. The court granted Direct TV's motion to compel arbitration. However, it rejected Direct TV's contention that class-wide arbitration was prohibited by the terms of the dealers' agreements, which provide for the resolution of all disputes by arbitration governed by the Federal Arbitration Act (FAA). Specifically, the court held that it, not the arbitrator, would have to determine the procedural class action issues (ie, whether the class should be certified), but that the merits of the underlying dispute should be decided by the arbitrator pursuant to the dealers' agreements with Direct TV.

Direct TV appealed the trial court's decision. On appeal, Direct TV argued that the parties agreed to be bound by the FAA, and not California state law, and that a class arbitration is not permitted by the FAA. The appellate court disagreed with Direct TV. It held that under California law, class-wide arbitration is permissible and California courts have the authority to order class-wide arbitration. Critically, the court observed that the notion of class-wide arbitration is entirely consistent with the 'letter and spirit of the FAA.' Therefore, the court held that so long as the trial court decided the issues relating to class certification, the class action could proceed in arbitration.

The Texas Court of Appeals has affirmed the decision of a trial court dismissing a franchisee's claim against the franchisor based upon forum selection clauses in four franchise agreements, which required the parties to litigate all claims in federal or state court located in San Francisco. My Caf'-CCC, Ltd., et al. v. Lunch Stop, Inc., __ S.W. 3d __, 2003 WL 21398304 (Tx. App. – Dallas 2003).

My Caf' executed four franchise agreements with Lunch Stop. Prior to entering into each franchise agreement, My Caf' received a franchise offering circular which advised My Caf' that the franchise agreement permitted the franchisee to sue only in San Francisco. In addition, each franchise agreement specifically provided that any dispute arising under or in connection with it and any claim affecting its validity, construction, effect, performance, or termination would be resolved exclusively by the federal or state courts in San Francisco.

Despite the forum selection provisions in the franchise agreements, My Caf' sued Lunch Stop in Dallas seeking to recover damages based on fraudulent inducement and breach of contract. My Caf' alleged that the forum selection clauses in the franchise agreements were unenforceable for two reasons ' because they did not comply with the Texas Business and Commerce Code and because they were procured by fraud. Lunch Stop argued, on the other hand, that the forum selection provisions were indeed enforceable and that the Dallas litigation should therefore be dismissed. The trial court agreed with Lunch Stop and granted its motion to dismiss 'because of a contractual forum selection requirement to litigate in California.' My Caf' appealed.

The appellate court agreed with the trial court and held that the forum selection provisions in the franchise agreements were enforceable. Specifically, the court found that since the forum selection clauses were disclosed in each offering circular, the Texas Business and Commerce Code ' 41,104(b)(8), which prohibits the application of forum selection clauses under certain limited circumstances, did not apply. Instead, the court observed that forum selection clauses are routinely enforced in Texas, provided that the parties have contractually consented to submit to the exclusive jurisdiction of another state and the other state recognizes the validity of such provisions. Interestingly, the franchisee never argued that California may not recognize the validity of such provisions (at least in the franchise context).

The court also found that because the forum selection clause encompassed all causes of action concerning the contract, the claim that My Caf' was fraudulently induced to enter into the contract could not void the forum selection clause. Therefore, the appellate court affirmed the trial court's decision to dismiss the case.