Anti-Waiver Arguments and Enforcement of Forum-Selection Clauses

Contractual forum-selection clauses ' where the parties agree on the judicial or arbitral forum for resolution of any future disputes ' are a fairly standard feature in commercial agreements generally. In franchise agreements, these provisions often designate the state where the franchisor's home office is located as the proper venue. In a 40- or 50-page franchise agreement, these short clauses may seem insignificant, but they are critical in litigation and must be given considerable attention.

There is a well-developed body of law favoring enforcement of forum-selection clauses in commercial contracts. But despite the deference afforded to these clauses generally, franchisors can face significant hurdles in enforcing them. Venue in the jurisdiction agreed upon by the parties to a franchise agreement is not a foregone conclusion because a large contingent of states has adopted franchise statutes containing anti-waiver laws designed to make forum-selection clauses unenforceable. For example, the anti-waiver provision in the California Franchise Relations Act provides: “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.” Cal. Bus. & Prof. Code '20040.5. Similar anti-waiver provisions have been adopted by many other states, including Connecticut, Florida, Idaho, Illinois, Indiana, Iowa, Louisiana, Maryland, Michigan, Minnesota, New Jersey, New York, North Carolina, North Dakota, Rhode Island, South Dakota, Texas, Washington and Wisconsin. These anti-waiver provisions make it difficult to predict whether or not a forum-selection clause in a franchise agreement will be enforced, as some of the laws only apply in specific contexts, and courts often exercise public-policy based discretion. That sort of uncertainty is a big concern for franchisors.

Franchisees who view their home states as more convenient or more favorable frequently use these anti-waiver provisions in an attempt to negate the forum-selection clauses to which they agreed when they signed the franchise agreement. Against this backdrop, the Allegra v. Davis opinion is significant, and perhaps paves the way for greater certainty for parties to a franchise agreement regarding where their disputes will be heard.

Allegra v. Davis

The Allegra case initially arose out of a franchisee's alleged violation of a post-term non-competition covenant contained in the franchise agreement. Defendants in the case were a Minnesota-based entity (the franchisee) and two individual Minnesota residents (guarantors of the franchise agreement). Two Allegra entities ' the franchisor and the trademark holder ' filed suit in the Eastern District of Michigan for injunctive relief and damages under theories of trademark infringement, unfair competition, breach of franchise agreement and breach of guarantee agreement.

The defendants responded with a motion for change of venue, which sought to move the case to the U.S. District Court for the District of Minnesota, the franchisee's and guarantors' home base. The defendants argued that the franchise agreement and the Minnesota Franchise Act required that Allegra litigate its claims against them solely in the state of Minnesota.

The franchise agreement provided for suit exclusively in “the state or federal court of general jurisdiction in or nearest to Troy, Michigan” ' the Eastern District of Michigan for federal lawsuits. The forum-selection clause further provided that nothing in the franchise agreement abrogated or reduced any of the franchisee's rights under Minnesota Statutes Chapter 80C (the franchise law) or its rights to any procedure, forum or remedies provided by Minnesota law. The clause specifically acknowledged that Minn. Stat. Sec. 80C.21 and Minn. Rule 2860.4400(J) prohibited the franchisor (except in certain specified cases) from requiring venue outside of Minnesota.

The defendants maintained that despite their explicit agreement to litigate in Michigan, the franchisor's filing suit in the Eastern District was tantamount to requiring litigation to be conducted outside of Minnesota and was thus a violation of both the franchise agreement and Minnesota law (specifically Section 80C.21 of the Minnesota Franchise Act and Minnesota Rule 2860.4400(J)).

In rejecting the defendants' arguments and refusing to transfer venue, the court issued two key holdings. First, the court sided with Allegra that there was nothing in the forum-selection provision that limited the defendants' access to Minnesota courts should they choose to file a lawsuit. Second, the court found that the Minnesota statute and rule did not preclude parties to a franchise agreement from agreeing to a forum-selection clause.

The court looked specifically at the language of both the Minnesota Franchise Act and the Rule. The anti-waiver provision of the Minnesota Franchise Act states: “Any condition, stipulation or provision ' purporting to bind any person who, at the time of acquiring a franchise is a resident of this state, or, in the case of a partnership or corporation, organized or incorporated under the laws of this state, or purporting to bind a person acquiring any franchise to be operated in this state to waive compliance or which has the effect of waiving compliance with any provision of sections 80C.01 to 80C.022 or any rule or order thereunder is void.” Minn. Stat. '80C.21. The court held that the defendants read too much into this provision by arguing that the “anti-waiver” language precludes a franchisor from litigating in a non-Minnesota forum. Rather, the court reasoned that the plain meaning of the anti-waiver provision is to prohibit franchisors from abrogating or contradicting the rights afforded to Minnesota franchises under the franchise act.

Likewise, the Minnesota Rule that it “shall be unfair or inequitable for any person to ' require a franchisee to waive his or her rights to a jury trial or to waive rights to any procedure, forum, or remedies provided for by the laws of the jurisdiction” did not prohibit litigation outside of Minnesota. Minn. R. 2960.4400(J). Here again, the court construed this language as preventing waiver of the franchisee's rights under the franchise act and held that nothing in the choice of forum provision in any way diminished defendants' right to avail themselves of Minnesota laws or a Minnesota forum.

Lessons Learned from Allegra

There are a few key points that parties to a franchise agreement should take away from the Allegra opinion. First and foremost, as long as a forum-selection clause designating a particular venue does not operate as a waiver of a franchisee's rights under an applicable state franchise act, the clause can be deemed proper and valid.

Second, the U.S. Supreme Court's recent decision in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, 134 S. Ct. 568 (U.S. 2013), on which the court in Allegra relied heavily, provides the analytical framework courts should use to evaluate motions to transfer venue pursuant to 28 U.S.C. '1404(a) when the parties' agreement contains a valid forum selection clause.

In Atlantic Marine, the U.S. Supreme Court found that when the parties' contract contains an agreement as to venue, the principle concern is to “not unnecessarily disrupt the parties' settled expectations.” Atl. Marine, 134 S. Ct. at 583. When there is a forum-selection clause, considerations of private factors such as convenience of the parties and their friendly witnesses should automatically weigh in favor of the preselected forum, requiring courts to consider only the public interest factor in deciding a motion to transfer venue. Contrast this to a typical section 1404(a) motion where the court would “weigh the relevant factors and decide whether, on balance, a transfer would serve 'the convenience of parties and witnesses' and otherwise promote the 'interest of justice.'” Id. at 581 (quoting 28 U.S.C. '1404(a)).

Finally, Allegra confirms that a section 1404(a) motion to transfer is the proper method for franchisees to challenge the venue prescribed by a forum-selection clause in federal court. The defendants in Allegra brought their motion pursuant to Fed. R. Civ. P. 12(b)(3), which provides that a party may assert certain defenses such as improper venue by motion. But, the court did not treat it as such. Instead, relying on Atlantic Marine, it treated the motion as a motion to transfer venue under 28 U.S.C. '1404(a). The court determined that, since the motion was based on the terms of a contractual forum selection clause, it was a motion to transfer venue and not a motion to dismiss under Rule 12(b)(3).

Conclusion

Allegra represents a huge victory for franchisors seeking to enforce the forum-selection clauses of their franchise agreements in the face of state franchise acts containing anti-waiver provisions. While franchisors may still encounter an uphill battle in some states, enforcement of valid forum-selection clauses appears to be gaining some traction.

Fredric A. Cohen is a founding partner of Cheng Cohen LLC in Chicago where he heads the firm's franchise litigation group. Allison R. Grow is an associate with the firm. They may be reached by phone at 312-243-1701 or by e-mail at [email protected] or [email protected], respectively. Cheng Cohen LLC represented Allegra in the case discussed in this article.

Anti-waiver provisions in state franchise acts have traditionally been used to trump the venue designated in the franchise agreement and to successfully transfer venue to the franchisee's home state. However, a recent decision from the U.S. District Court for the Eastern District of Michigan has added weight to a small but growing body of cases enforcing forum-selection clauses against franchisees that operate in states with franchise acts containing anti-waiver provisions.

In Allegra Holdings, LLC v. Davis, 2014 U.S. Dist. LEXIS 57086 (E.D. Mich. Apr. 24, 2014), the court held that the anti-waiver provision of the Minnesota Franchise Act simply operates to prohibit franchisors from abrogating the rights afforded by the Act to franchisees. The court concluded that, despite the Act's anti-waiver provision, the clause in the franchise agreement designating venue in Michigan was valid since it did not operate as a waiver of the franchisee's rights under the Act; the franchisee could still sue in Minnesota if it wanted. This ruling may signal a turning of the tide in favor of enforcing the parties' chosen venue.

The Intersection of Forum-Selection Clauses and Anti-Waiver Provisions

Contractual forum-selection clauses ' where the parties agree on the judicial or arbitral forum for resolution of any future disputes ' are a fairly standard feature in commercial agreements generally. In franchise agreements, these provisions often designate the state where the franchisor's home office is located as the proper venue. In a 40- or 50-page franchise agreement, these short clauses may seem insignificant, but they are critical in litigation and must be given considerable attention.

There is a well-developed body of law favoring enforcement of forum-selection clauses in commercial contracts. But despite the deference afforded to these clauses generally, franchisors can face significant hurdles in enforcing them. Venue in the jurisdiction agreed upon by the parties to a franchise agreement is not a foregone conclusion because a large contingent of states has adopted franchise statutes containing anti-waiver laws designed to make forum-selection clauses unenforceable. For example, the anti-waiver provision in the California Franchise Relations Act provides: “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.” Cal. Bus. & Prof. Code '20040.5. Similar anti-waiver provisions have been adopted by many other states, including Connecticut, Florida, Idaho, Illinois, Indiana, Iowa, Louisiana, Maryland, Michigan, Minnesota, New Jersey, New York, North Carolina, North Dakota, Rhode Island, South Dakota, Texas, Washington and Wisconsin. These anti-waiver provisions make it difficult to predict whether or not a forum-selection clause in a franchise agreement will be enforced, as some of the laws only apply in specific contexts, and courts often exercise public-policy based discretion. That sort of uncertainty is a big concern for franchisors.

Franchisees who view their home states as more convenient or more favorable frequently use these anti-waiver provisions in an attempt to negate the forum-selection clauses to which they agreed when they signed the franchise agreement. Against this backdrop, the Allegra v. Davis opinion is significant, and perhaps paves the way for greater certainty for parties to a franchise agreement regarding where their disputes will be heard.

Allegra v. Davis

The Allegra case initially arose out of a franchisee's alleged violation of a post-term non-competition covenant contained in the franchise agreement. Defendants in the case were a Minnesota-based entity (the franchisee) and two individual Minnesota residents (guarantors of the franchise agreement). Two Allegra entities ' the franchisor and the trademark holder ' filed suit in the Eastern District of Michigan for injunctive relief and damages under theories of trademark infringement, unfair competition, breach of franchise agreement and breach of guarantee agreement.

The defendants responded with a motion for change of venue, which sought to move the case to the U.S. District Court for the District of Minnesota, the franchisee's and guarantors' home base. The defendants argued that the franchise agreement and the Minnesota Franchise Act required that Allegra litigate its claims against them solely in the state of Minnesota.

The franchise agreement provided for suit exclusively in “the state or federal court of general jurisdiction in or nearest to Troy, Michigan” ' the Eastern District of Michigan for federal lawsuits. The forum-selection clause further provided that nothing in the franchise agreement abrogated or reduced any of the franchisee's rights under Minnesota Statutes Chapter 80C (the franchise law) or its rights to any procedure, forum or remedies provided by Minnesota law. The clause specifically acknowledged that Minn. Stat. Sec. 80C.21 and Minn. Rule 2860.4400(J) prohibited the franchisor (except in certain specified cases) from requiring venue outside of Minnesota.

The defendants maintained that despite their explicit agreement to litigate in Michigan, the franchisor's filing suit in the Eastern District was tantamount to requiring litigation to be conducted outside of Minnesota and was thus a violation of both the franchise agreement and Minnesota law (specifically Section 80C.21 of the Minnesota Franchise Act and Minnesota Rule 2860.4400(J)).

In rejecting the defendants' arguments and refusing to transfer venue, the court issued two key holdings. First, the court sided with Allegra that there was nothing in the forum-selection provision that limited the defendants' access to Minnesota courts should they choose to file a lawsuit. Second, the court found that the Minnesota statute and rule did not preclude parties to a franchise agreement from agreeing to a forum-selection clause.

The court looked specifically at the language of both the Minnesota Franchise Act and the Rule. The anti-waiver provision of the Minnesota Franchise Act states: “Any condition, stipulation or provision ' purporting to bind any person who, at the time of acquiring a franchise is a resident of this state, or, in the case of a partnership or corporation, organized or incorporated under the laws of this state, or purporting to bind a person acquiring any franchise to be operated in this state to waive compliance or which has the effect of waiving compliance with any provision of sections 80C.01 to 80C.022 or any rule or order thereunder is void.” Minn. Stat. '80C.21. The court held that the defendants read too much into this provision by arguing that the “anti-waiver” language precludes a franchisor from litigating in a non-Minnesota forum. Rather, the court reasoned that the plain meaning of the anti-waiver provision is to prohibit franchisors from abrogating or contradicting the rights afforded to Minnesota franchises under the franchise act.

Likewise, the Minnesota Rule that it “shall be unfair or inequitable for any person to ' require a franchisee to waive his or her rights to a jury trial or to waive rights to any procedure, forum, or remedies provided for by the laws of the jurisdiction” did not prohibit litigation outside of Minnesota. Minn. R. 2960.4400(J). Here again, the court construed this language as preventing waiver of the franchisee's rights under the franchise act and held that nothing in the choice of forum provision in any way diminished defendants' right to avail themselves of Minnesota laws or a Minnesota forum.

Lessons Learned from Allegra

There are a few key points that parties to a franchise agreement should take away from the Allegra opinion. First and foremost, as long as a forum-selection clause designating a particular venue does not operate as a waiver of a franchisee's rights under an applicable state franchise act, the clause can be deemed proper and valid.

Second, the U.S. Supreme Court's recent decision in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, 134 S. Ct. 568 (U.S. 2013), on which the court in Allegra relied heavily, provides the analytical framework courts should use to evaluate motions to transfer venue pursuant to 28 U.S.C. '1404(a) when the parties' agreement contains a valid forum selection clause.

In Atlantic Marine, the U.S. Supreme Court found that when the parties' contract contains an agreement as to venue, the principle concern is to “not unnecessarily disrupt the parties' settled expectations.” Atl. Marine, 134 S. Ct. at 583. When there is a forum-selection clause, considerations of private factors such as convenience of the parties and their friendly witnesses should automatically weigh in favor of the preselected forum, requiring courts to consider only the public interest factor in deciding a motion to transfer venue. Contrast this to a typical section 1404(a) motion where the court would “weigh the relevant factors and decide whether, on balance, a transfer would serve 'the convenience of parties and witnesses' and otherwise promote the 'interest of justice.'” Id. at 581 (quoting 28 U.S.C. '1404(a)).

Finally, Allegra confirms that a section 1404(a) motion to transfer is the proper method for franchisees to challenge the venue prescribed by a forum-selection clause in federal court. The defendants in Allegra brought their motion pursuant to Fed. R. Civ. P. 12(b)(3), which provides that a party may assert certain defenses such as improper venue by motion. But, the court did not treat it as such. Instead, relying on Atlantic Marine, it treated the motion as a motion to transfer venue under 28 U.S.C. '1404(a). The court determined that, since the motion was based on the terms of a contractual forum selection clause, it was a motion to transfer venue and not a motion to dismiss under Rule 12(b)(3).

Conclusion

Allegra represents a huge victory for franchisors seeking to enforce the forum-selection clauses of their franchise agreements in the face of state franchise acts containing anti-waiver provisions. While franchisors may still encounter an uphill battle in some states, enforcement of valid forum-selection clauses appears to be gaining some traction.

Fredric A. Cohen is a founding partner of Cheng Cohen LLC in Chicago where he heads the firm's franchise litigation group. Allison R. Grow is an associate with the firm. They may be reached by phone at 312-243-1701 or by e-mail at [email protected] or [email protected], respectively. Cheng Cohen LLC represented Allegra in the case discussed in this article.