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Entries in dispute clauses (2)

Tuesday
Oct282014

Venue and Choice of Law Provisions Not Enforceable in California

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com

October 2014

 

American Bar Association Franchise Legal Seminar

Barry Kurtz, David Gurnick, Tal Grinblat and Bryan H. Clements attended the American Bar Association's annual legal seminar for franchise attorneys. The seminar provides an opportunity for attendees to focus on industry-wide legal concerns. Barry Kurtz co-chaired a special industry relationship workshop on beer distribution, oil and gas and automobile dealership law.

David Gurnick Named one of the Best Lawyers in America 2015

David Gurnick was recently selected by his peers for inclusion in The Best Lawyers in America 2015, for Franchise Law. The list was published in a special supplement to the Wall Street Journal earlier this month. Click: Best Lawyers to see the listing. 

Los Angeles Franchise Panel Discussion

Barry Kurtz participated in a panel discussion and Q&A for potential franchisors, franchisees, business attorneys and accountants in Southern California regarding the A-Zs of franchising a business, buying a franchise, accessing capital, and other topics. The breakfast event was hosted by The Los Angeles Business Journal on October 3rd. 

California Bar Business Law Leadership Conference

Tal Grinblat, representing the State Bar of California Franchise Law Committee, participated in a two day leadership conference hosted by the Business Law Section in Dana Point, California. The conference addressed steps to improve the Committee, sponsorship of legislation, and the promotion of the Business Law Section of the Bar. 

Barry Kurtz published in The Los Angeles Business Journal

Franchising is a flexible, tried and true method of distributing products and services and offers business owners an alternative avenue to expand... To read more, click: Is Franchising the Right Model for Your Business?

 

FRANCHISOR 101:
Venue and Choice of Law Provisions Not Enforceable in California


Attorney for Franchising 

In 2013, Pepe's Franchising, a U.K. company, entered into a Master Franchise Agreement with Frango Grill, based in California, granting the right to operate and franchise Pepe's restaurants in California. The Agreement's venue clause required all disputes to be brought in London, where Pepe's was headquartered, and required U.K. law to apply.

In 2014, Frango sent a letter to Pepe's stating its intent to rescind the Master Franchise Agreement. Frango sued Pepe's in Los Angeles alleging franchise law claims. Pepe's moved to dismiss the action or move it to London pursuant to the Agreement's venue clause. Frango, citing California's Franchise Relations Act (CFRA), opposed Pepe's motion, claiming the California statute trumped the Agreement's venue requirements. Section 20040.5 of the CFRA states 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.

Pepe's argued the CFRA should only apply when it would be unfair to apply the forum selection clause. The court ruled that the statute covers all venue restrictions, not just clauses imposed unfairly, and held that due to California's strong public policy, Section 20040.5 invalidated the agreed forum for resolving disputes. The court also held that California law would apply despite contrary provisions of the Master Franchise Agreement because Pepe's admitted that the laws of both jurisdictions were the same.

Furthermore, the court found that Pepe's sought to do business in California and registered its franchise disclosure document in California. Therefore, Pepe's should have contemplated that any franchisee dispute would be litigated in California.

When dealing with franchisees in multiple jurisdictions, a franchisor should not assume that its choice of law and forum agreement will be enforced. Review of the laws in jurisdictions where franchises are granted may be useful to assess risks related to the parties' selected forum and choice of law.

Franchisors should also consider the benefits of filing lawsuits preemptively against non-compliant franchisees in the jurisdiction stated in the franchise agreement to lessen the risk of litigating disputes in the franchisee's choice of forum.

To read about the case, click: Frango Grille USA Inc., v. Pepe's Franchising Ltd. 

FRANCHISEE 101:
Illusory Arbitration Provisions Not Enforceable in Indiana


Franchise Lawyer

In 2010, Steak 'n Shake, a franchisor of hamburger restaurants, adopted new pricing and promotion policies that required all franchisees to follow company mandated pricing on every menu item and to participate in all promotions mandated by the franchisor.

Three franchisees resisted this policy, claiming that all Steak 'n Shake franchisees enjoyed the right to set their own menu prices and participate in corporate pricing promotions at their option since 1939. They sued the franchisor in federal court.

One month later, Steak 'n Shake adopted an arbitration policy requiring franchisees to engage in non-binding arbitration of all disputes at Steak 'n Shake's request. Then Steak 'n Shake moved to stay the federal lawsuit and compel arbitration based on a provision in its franchise agreement that granted Steak 'n Shake the right to initiate a system of non-binding arbitration and mediation at any time.

The court denied Steak 'n Shake's motion, holding that the arbitration clause was illusory and unenforceable because there was no limit on Steak 'n Shake's ability to arbitrate at its whim and, as a result, it was purely optional. An illusory promise is one that makes performance entirely optional with the promisor.

On appeal, Steak 'n Shake argued that the arbitration provision was not illusory. The appellate court disagreed, holding that Steak 'n Shake did not satisfy an essential requirement needed to compel arbitration: a clear agreement to arbitrate. The appellate court found the arbitration agreement was illusory because performance of the arbitration provision was optional to Steak 'n Shake and the provisions were so vague and indefinite that the material terms could not be determined.

All parties can benefit from reviewing the franchise agreement's arbitration provisions to determine whether to proceed in a dispute through litigation or arbitration. Though an agreement may require arbitration, if its terms are illusory or ambiguous, it may be possible to pursue claims in court.

For more information, click: Appellate Court's opinion for Steak 'n Shake Enterprises, Inc.

 

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2014. All Rights Reserved.

 

Thursday
Jul242014

Location of Dispute Clauses Will Be Enforced

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com

July 2014

 

Top Ranked Law Firms 2014

Lewitt Hackman was named one of the Top Ranked Law Firms in California by Martindale-Hubbell for the third, consecutive year. The rankings are based on the size of the firm and the percentage of attorneys who have earned an AV Preeminent rating by Martindale-Hubbell. Lewitt Hackman well exceeds the selection criteria.

 

Franchise Distribution Lawyers*Certified Specialist, Franchise & Distribution Law - State Bar of California Board of Legal Specialization

Heard in Sacramento…

Tal Grinblat, as Vice Chair of Legislation for the Franchise Law Committee of the State Bar of California, was invited to Sacramento by the Department of Business Oversight to discuss Assembly Bill 2289. The bill aims to change the automatic effectiveness statue of the California Franchise Investment law. The DBO agreed to hear the Committee's concerns regarding potential delays for franchisors applying to register or renew franchises in California.

 

David Gurnick and Tal Grinblat published inThe Franchise Lawyer

"Lawyers typically view the accountant's role in franchising to be mainly auditing the franchisor's financial statements and consenting to their use in the FDD. But accountants can play other valuable roles, from developing franchise programs to..."
Continue reading: Finding Value: The Roles of Accountants
in Franchising

 

FRANCHISOR 101:
Location of Dispute Clauses Will Be Enforced

Location of Dispute Clauses

A recent U.S. Supreme Court decision is having a big impact on the locations where franchisor-franchisee disputes are being resolved.

The Supreme Court's conservative-liberal divide is well known. Four of the Justices lean conservative: Chief Justice Roberts and Justices Thomas, Scalia and Alito. Four Justices tilt liberal in their rulings: Justices Ginsburg, Breyer, Sotomayoer and Kagan. Many outcomes hinge on the views of the remaining Justice, Kennedy.

But the recent landmark decision was unanimous! Despite their wide range of political leanings, all nine Supreme Court Justices agreed.

Franchise Agreements often specify the state, county or city where disputes will be litigated. The case of Atlantic Marine Construction Co. v. U.S. District Court concerned such a clause. A construction company, Atlantic Marine, entered into a contract with the Army to build a structure at Fort Hood in Texas, and a subcontract for a management company to work on the project. The subcontract said all disputes would be litigated in Virginia. But when a dispute arose, the management company sued in Texas.

It has been a longtime practice among many lawyers to start lawsuits or arbitrations locally, or in a court of choice, regardless of what the parties' agreement says. Courts and arbitrators applied a variety of legal theories to avoid the contractually agreed location. But in Atlantic Marine, the Supreme Court said an agreement on where disputes will be resolved "represents the parties' agreement as to the most proper forum;" and "enforcement of valid forum-selection clauses, bargained for by the parties, protects their legitimate expectations and furthers vital interests of the justice system."

Therefore, "a valid forum-selection clause should be given controlling weight in all but the most exceptional cases."

The Atlantic Marine decision was announced just seven months ago, in December 2013. Already. It has dramatically affected many franchising cases.

In just the few months since it was decided, published decisions show that Burger King was able to get a franchisee lawsuit moved to Burger King's home court in Florida, and other franchisors such as Country Inn & Suites, Hawthorne Suites and Salad Works were able to defeat franchisee efforts to relocate cases away from franchisor home courts.

A message for franchisors and franchisees is to pay careful attention to the location-for-dispute clauses in franchise agreements and other agreements. As one court stated:

The decision in Atlantic Marine now provides the analytical framework a court should employ when a valid and enforceable forum selection clause exists between the parties.

This means those clauses in the franchise agreement are typically going to be enforced. Read the U.S. Supreme Court Opinion: Atlantic Marine Construction Co., Inc. v. U.S. District Court for the Western District of Texas

 

FRANCHISEE 101:
Think Carefully About Agreeing to Arbitration

Franchise Arbitration Clauses

Another type of clause often appearing in Franchise Agreements (and other agreements) is an arbitration clause. Arbitration is a form of dispute resolution that is an alternative to going to court.

In court, a case follows the court's rules and decisions are made by the judge or jury. Arbitration can be less formal, and decisions are made by a mutually agreeable arbitrator.

Arbitration comes with a significant risk. Most arbitration decisions are not reviewable or appealable. Even if an arbitrator makes a mistake in deciding a case, generally it cannot be appealed.

Recently a franchisee of Wetzel's Pretzels arbitrated a dispute with the franchisor. The franchisee, dissatisfied with the outcome, asked a court to vacate the arbitrator's decision. The franchisee claimed:

The arbitrator exceeded his powers by enforcing certain provisions in the franchise agreement that required the [franchisee] to assign their lease and property interests to Wetzel's Pretzels after the franchise agreement was terminated.

The court would not consider the claim. Even if the arbitrator made a mistake, that would not be grounds. The court said:

In order for us to vacate the award on the ground that the arbitrator exceeded his powers.. the [Franchisees] would have to show that the award was "completely irrational, or exhibit[ed] a manifest disregard of law.

"Completely irrational" or "manifest disregard of the law" are very high, almost insurmountable standards to meet in trying to undo an arbitrator's decision.

A message from the recent Wetzel's Pretzel's decision is to think carefully before agreeing to arbitration of disputes. Many courts have noted that the arbitration process cannot be expected to be error free. Agreeing to arbitration means agreeing to and accepting the risk of errors as part of the decision-making outcome; error that cannot be corrected.

Read the opinion here: Wetzel's Pretzels, LLC v. Johnson

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2014. All Rights Reserved.

 

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