Court Watch

In RM Yogurt, the franchisee/plaintiff, a Hawaii limited liability company with its principal place of business in Honolulu, brought an action against the franchisor/defendant, a California corporation with its principal place of business in Dallas, TX. The action was initially filed by the franchisee in a Hawaii state court, but it was removed to the federal district court by the franchisor pursuant to 28 U.S.C. ' 1441. The franchisor then filed a motion to dismiss for improper venue and asked the court to transfer the action to the federal district in which it had its principal place of business ' the Northern District of Texas. The franchisor's motion was based upon a forum selection clause contained in the area development agreement signed by the franchisee which provided that any action “shall be brought within the state and federal judicial district in which FRANCHISOR has its principal place of business.”

The court in RM Yogurt first noted that federal law, not state law, controls the enforcement and interpretation of such forum selection clauses in diversity cases such as this. The court further observed that the enforceability of such clauses was controlled by the decision in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), where the U.S. Supreme Court held that forum selection clauses are presumptively valid and should be enforced absent some compelling and countervailing reason.

The court in RM Yogurt further explained that while Bremen had created a presumption in favor of enforcing forum selection clauses, Bremen also recognized three reasons that would make enforcement of a forum selection clause unreasonable. These reasons are: 1) if the clause was included as a result of fraud or overreaching; 2) if the party seeking to avoid the clause would effectively be deprived of his day in court, if the clause were enforced; or 3) if enforcement would contravene a strong public policy in the forum in which the suit is brought. The court in RM Yogurt went on to examine each of these three exceptions and found that none applied to the instant case.

First, the court found that the forum selection clause was not included in the area development agreement as a result of fraud or overreaching because the franchisee knowingly relied on the terms of the agreement in fashioning the very complaint filed in the instant action. Additionally, the court pointed out that the franchisee further relied on the terms of the agreement in entering into two subsequent lease agreements. Having previously relied on the other terms of the agreement, the court held that the franchisee's attempt to now repudiate the forum selection clause, “lacked consistency.”

The court next held that the enforcement of the forum selection clause would not deprive the franchisee of its day in court. The franchisee argued that “the financial burden that would be imposed on Plaintiff if forced to litigate in Texas will greatly affect its ability to have a meaningful day in court.” In rejecting this argument, the court cited the case of Manetti-Farrow v. Gucci America, Inc., 858 F.2d 509, 513 (9th Cir. 1988), where the Ninth Circuit enforced a forum selection clause requiring the plaintiff, a California corporation, to litigate in Florence, Italy, rather than in the Northern District of California. The court noted that the franchisee's financial burden in litigating in Texas was far less severe than the California franchisee forced to litigate in Italy. The court thus concluded that “a financial burden that greatly affects the ability to have a meaningful day in court, does not amount to effective deprivation.”

The court next rejected the franchisee's argument that the forum selection clause contravened the public policy of Hawaii. The franchisee cited the case of Jones v. GNC Franchising, Inc., 211 F.3d 495 (9th Cir. 2000), where the Ninth Circuit declined to enforce a forum selection clause based upon a California statute which held that “[a] provision in a franchise agreement restricting venue to a forum outside this state is void with respect to any claim arising under or relating to a franchise agreement involving a franchise business operating within this state.” The court found that, unlike California, Hawaii had no such statutory provision prohibiting the enforcement of forum selection clauses. Accordingly, the court held that the regulation of franchises in Hawaii did not amount to a “strong public policy” against such forum selection clauses.

The court similarly rejected the franchisee's argument that the forum selection clause was void pursuant to California law, which the franchisee argued governed the case pursuant to a choice-of-law clause contained in the Area Development Agreement. The court held that, assuming California law did apply, this law, as embodied in Jones v. GNC, “expresses a strong public policy of protecting California franchisees, not Hawaii franchisees.” Thus, the court held that California law did not void the forum selection clause agreed to by the Hawaii franchisee in this case.

Having found that none of the three exceptions mentioned in Bremen were present in the instant case, the court in RM Yogurt proceeded to reject the remaining arguments made by the franchisee. To that end, contrary to the franchisee's argument, the court found that the forum selection clause of this case was mandatory and not permissive. In reaching this conclusion, the court looked to the specific language of the clause and found determinative the language which reads that any action “shall be brought within the state and federal judicial district in which FRANCHISOR has its principal place of business.” The court contrasted this “mandatory” language with the “permissive” language of Hunt Wesson Foods, Inc. v. Supreme Oil Co., 817 F.2d 75 (9th Cir. 1987), which read that Orange County, CA courts “shall have jurisdiction over the parties.” Because the clause in the instant case was drafted with unambiguous mandatory language, the court concluded that it was enforceable.

The court next succinctly rejected the franchisee's argument that the franchisor's removal of the case from Hawaii state court to the federal district court foreclosed the franchisor's ability to claim that venue was improper. The court held that removal under 28 U.S.C. ' 1441 does not foreclose the removing party from claiming improper venue, “if the parties are bound by a valid and mandatory forum selection clause.”

Finally, the court rejected the franchisee's argument that the forum selection clause was void pursuant to the Hawaii Franchise Investment Law provision which provided that any person who engaged in franchise business in Hawaii “shall be amenable to the jurisdiction of the courts of this State and shall be amenable to service of process.” The court found that “this provision implicates personal jurisdiction and service of process and not venue.”

Having rejected all of the various arguments asserted by the franchisee against the forum selection clause, the court granted the franchisor's motion and ordered that the case be transferred to the U.S. District Court for the Northern District of Texas, as contemplated by the forum selection clause.

Arbitration Forum Selection Clause Voidable If Fraudulently Induced

The recent case of Binder v. Medicine Shoppe, Bus. Franchise Guide (CCH) ' 14,432 (E.D. Mich. 2010), illustrates that a franchisee can, in fact, successfully void a forum selection clause, if it can present sufficient evidence that it agreed to the clause as a result of the franchisor's fraudulent inducement.

In Binder, the plaintiff/franchisee was a Michigan corporation that entered into a license agreement with the defendant/franchisor, a Delaware corporation, to operate a Medicine Shoppe franchise in Fenton, MI. The license agreement contained an arbitration forum selection provision that provided that “all controversies, disputes or claims must be submitted for arbitration by the American Arbitration Association in St. Louis, Missouri.” When a dispute arose between the parties, the franchisor initiated arbitration in St. Louis.

Several months after the franchisor's initiation of arbitration in St. Louis, the franchisee responded by filing a lawsuit in Michigan state court. The franchisee claimed that it was fraudulently induced into agreeing to the arbitration forum selection clause, based upon certain representations contained in the offering circular given to it by the franchisor during the license agreement negotiations. In particular, the franchisee cited a term in the offering circular that stated that any provision in the franchise documents requiring that arbitration or litigation be conducted outside of the state of Michigan was contrary to Michigan law and void and unenforceable.

The franchisor in Binder removed the case from the Michigan state court to the federal district court and filed a motion to compel arbitration of the case in St. Louis, as provided for in the arbitration forum selection clause and as initiated by the franchisor. The franchisor argued that the Federal Arbitration Act (“FAA”), 9 U.S.C. ' 1 et. seq., pre-empted Michigan law, such that Michigan's statutory prohibition of out-of-state arbitration was without effect.

The court in Binder agreed with the franchisor that the FAA did pre-empt the Michigan statute, but the court went on to consider the franchisee's fundamental argument that it was fraudulently induced to accept the arbitration forum selection clause. The court found that indeed the offering circular did misrepresent the franchisor's intended future conduct by implying that the franchisor would not resort to arbitration outside the state of Michigan. While the court rejected the franchisee's argument that the franchisee reasonably relied on the offering circular for the proposition that it would not be compelled to arbitrate anywhere, the court did find that the franchisee reasonably relied on the offering circular to conclude that it would not be compelled to arbitrate outside the state of Michigan.

The court thus granted the franchisor's motion to compel arbitration, but ordered that the arbitration that the franchisor had initiated in St. Louis be transferred to the franchisee's home state of Michigan.

Michael W. Tyler is a partner in the Atlanta office of Kilpatrick Stockton LLP. He can be contacted at 404-815-6474 or [email protected].

Forum Selection Clauses Are Presumptively Valid and Enforceable

It is typical for franchise agreements to contain forum selection clauses that require any dispute to be resolved in the state and federal district in which the franchisor has its headquarters or principal place of business. The rationale behind such forum selection clauses is quite obvious. They provide the franchisor with the convenience and advantage of litigating on its home turf where it presumably has the greatest familiarity with the law and the courts. Additionally, such clauses significantly reduce the expense that a franchisor might otherwise incur in litigating against franchisees in distant locales. Finally, and perhaps most significantly, by confining all litigation to its own backyard, a franchisor maximizes the prospect of benefiting from any local goodwill that might affect the litigation process, while minimizing the risk of being the victim of prejudicial “home cooking” that might be served up in a franchisee's foreign kitchen.

Given the perceived advantages that forum selection clauses confer upon franchisors, it is not surprising that franchisees often will litigate aggressively to avoid the strictures of these clauses. In the recent case of RM Yogurt Hawaii LLC. v. Red Mango Franchising Co., Bus. Franchise Guide (CCH) ' 14,405 (D.C. Hawaii 2010), a franchisee launched a multi-pronged frontal assault on the forum selection clause involved in that matter. While the franchisee was ultimately unsuccessful in persuading the court to accept any of its challenges, the case, nonetheless, illustrates the plethora of plausible arguments that may be lodged against forum selection clauses by franchisees.

In RM Yogurt, the franchisee/plaintiff, a Hawaii limited liability company with its principal place of business in Honolulu, brought an action against the franchisor/defendant, a California corporation with its principal place of business in Dallas, TX. The action was initially filed by the franchisee in a Hawaii state court, but it was removed to the federal district court by the franchisor pursuant to 28 U.S.C. ' 1441. The franchisor then filed a motion to dismiss for improper venue and asked the court to transfer the action to the federal district in which it had its principal place of business ' the Northern District of Texas. The franchisor's motion was based upon a forum selection clause contained in the area development agreement signed by the franchisee which provided that any action “shall be brought within the state and federal judicial district in which FRANCHISOR has its principal place of business.”

The court in RM Yogurt first noted that federal law, not state law, controls the enforcement and interpretation of such forum selection clauses in diversity cases such as this. The court further observed that the enforceability of such clauses was controlled by the decision in M/S Bremen v. Zapata Off-Shore Co. , 407 U.S. 1 (1972), where the U.S. Supreme Court held that forum selection clauses are presumptively valid and should be enforced absent some compelling and countervailing reason.

The court in RM Yogurt further explained that while Bremen had created a presumption in favor of enforcing forum selection clauses, Bremen also recognized three reasons that would make enforcement of a forum selection clause unreasonable. These reasons are: 1) if the clause was included as a result of fraud or overreaching; 2) if the party seeking to avoid the clause would effectively be deprived of his day in court, if the clause were enforced; or 3) if enforcement would contravene a strong public policy in the forum in which the suit is brought. The court in RM Yogurt went on to examine each of these three exceptions and found that none applied to the instant case.

First, the court found that the forum selection clause was not included in the area development agreement as a result of fraud or overreaching because the franchisee knowingly relied on the terms of the agreement in fashioning the very complaint filed in the instant action. Additionally, the court pointed out that the franchisee further relied on the terms of the agreement in entering into two subsequent lease agreements. Having previously relied on the other terms of the agreement, the court held that the franchisee's attempt to now repudiate the forum selection clause, “lacked consistency.”

The court next held that the enforcement of the forum selection clause would not deprive the franchisee of its day in court. The franchisee argued that “the financial burden that would be imposed on Plaintiff if forced to litigate in Texas will greatly affect its ability to have a meaningful day in court.” In rejecting this argument, the court cited the case of Manetti-Farrow v. Gucci America, Inc. , 858 F.2d 509, 513 (9th Cir. 1988), where the Ninth Circuit enforced a forum selection clause requiring the plaintiff, a California corporation, to litigate in Florence, Italy, rather than in the Northern District of California. The court noted that the franchisee's financial burden in litigating in Texas was far less severe than the California franchisee forced to litigate in Italy. The court thus concluded that “a financial burden that greatly affects the ability to have a meaningful day in court, does not amount to effective deprivation.”

The court next rejected the franchisee's argument that the forum selection clause contravened the public policy of Hawaii. The franchisee cited the case of Jones v. GNC Franchising, Inc. , 211 F.3d 495 (9th Cir. 2000), where the Ninth Circuit declined to enforce a forum selection clause based upon a California statute which held that “[a] provision in a franchise agreement restricting venue to a forum outside this state is void with respect to any claim arising under or relating to a franchise agreement involving a franchise business operating within this state.” The court found that, unlike California, Hawaii had no such statutory provision prohibiting the enforcement of forum selection clauses. Accordingly, the court held that the regulation of franchises in Hawaii did not amount to a “strong public policy” against such forum selection clauses.

The court similarly rejected the franchisee's argument that the forum selection clause was void pursuant to California law, which the franchisee argued governed the case pursuant to a choice-of-law clause contained in the Area Development Agreement. The court held that, assuming California law did apply, this law, as embodied in Jones v. GNC, “expresses a strong public policy of protecting California franchisees, not Hawaii franchisees.” Thus, the court held that California law did not void the forum selection clause agreed to by the Hawaii franchisee in this case.

Having found that none of the three exceptions mentioned in Bremen were present in the instant case, the court in RM Yogurt proceeded to reject the remaining arguments made by the franchisee. To that end, contrary to the franchisee's argument, the court found that the forum selection clause of this case was mandatory and not permissive. In reaching this conclusion, the court looked to the specific language of the clause and found determinative the language which reads that any action “shall be brought within the state and federal judicial district in which FRANCHISOR has its principal place of business.” The court contrasted this “mandatory” language with the “permissive” language of Hunt Wesson Foods, Inc. v. Supreme Oil Co. , 817 F.2d 75 (9th Cir. 1987), which read that Orange County, CA courts “shall have jurisdiction over the parties.” Because the clause in the instant case was drafted with unambiguous mandatory language, the court concluded that it was enforceable.

The court next succinctly rejected the franchisee's argument that the franchisor's removal of the case from Hawaii state court to the federal district court foreclosed the franchisor's ability to claim that venue was improper. The court held that removal under 28 U.S.C. ' 1441 does not foreclose the removing party from claiming improper venue, “if the parties are bound by a valid and mandatory forum selection clause.”

Finally, the court rejected the franchisee's argument that the forum selection clause was void pursuant to the Hawaii Franchise Investment Law provision which provided that any person who engaged in franchise business in Hawaii “shall be amenable to the jurisdiction of the courts of this State and shall be amenable to service of process.” The court found that “this provision implicates personal jurisdiction and service of process and not venue.”

Having rejected all of the various arguments asserted by the franchisee against the forum selection clause, the court granted the franchisor's motion and ordered that the case be transferred to the U.S. District Court for the Northern District of Texas, as contemplated by the forum selection clause.

Arbitration Forum Selection Clause Voidable If Fraudulently Induced

The recent case of Binder v. Medicine Shoppe, Bus. Franchise Guide (CCH) ' 14,432 (E.D. Mich. 2010), illustrates that a franchisee can, in fact, successfully void a forum selection clause, if it can present sufficient evidence that it agreed to the clause as a result of the franchisor's fraudulent inducement.

In Binder, the plaintiff/franchisee was a Michigan corporation that entered into a license agreement with the defendant/franchisor, a Delaware corporation, to operate a Medicine Shoppe franchise in Fenton, MI. The license agreement contained an arbitration forum selection provision that provided that “all controversies, disputes or claims must be submitted for arbitration by the American Arbitration Association in St. Louis, Missouri.” When a dispute arose between the parties, the franchisor initiated arbitration in St. Louis.

Several months after the franchisor's initiation of arbitration in St. Louis, the franchisee responded by filing a lawsuit in Michigan state court. The franchisee claimed that it was fraudulently induced into agreeing to the arbitration forum selection clause, based upon certain representations contained in the offering circular given to it by the franchisor during the license agreement negotiations. In particular, the franchisee cited a term in the offering circular that stated that any provision in the franchise documents requiring that arbitration or litigation be conducted outside of the state of Michigan was contrary to Michigan law and void and unenforceable.

The franchisor in Binder removed the case from the Michigan state court to the federal district court and filed a motion to compel arbitration of the case in St. Louis, as provided for in the arbitration forum selection clause and as initiated by the franchisor. The franchisor argued that the Federal Arbitration Act (“FAA”), 9 U.S.C. ' 1 et. seq., pre-empted Michigan law, such that Michigan's statutory prohibition of out-of-state arbitration was without effect.

The court in Binder agreed with the franchisor that the FAA did pre-empt the Michigan statute, but the court went on to consider the franchisee's fundamental argument that it was fraudulently induced to accept the arbitration forum selection clause. The court found that indeed the offering circular did misrepresent the franchisor's intended future conduct by implying that the franchisor would not resort to arbitration outside the state of Michigan. While the court rejected the franchisee's argument that the franchisee reasonably relied on the offering circular for the proposition that it would not be compelled to arbitrate anywhere, the court did find that the franchisee reasonably relied on the offering circular to conclude that it would not be compelled to arbitrate outside the state of Michigan.

The court thus granted the franchisor's motion to compel arbitration, but ordered that the arbitration that the franchisor had initiated in St. Louis be transferred to the franchisee's home state of Michigan.

Michael W. Tyler is a partner in the Atlanta office of Kilpatrick Stockton LLP. He can be contacted at 404-815-6474 or [email protected].