Franchise 101: Breaking Up Is Hard to Do; and Don’t Mess with Forum Selection Clauses

Franchisor 101: Breaking Up Is Hard to Do

A federal district court in Nevada partly denied a franchisor’s summary judgment motion on claims brought by a franchisee.

IJL Midwest entered into several franchise agreements with a franchisor of a dating and match-making service, It’s Just Lunch Int’l (“IJL”). IJL asked IJL Midwest for financial records per the franchise agreements, to determine the amount of fees and royalties owed. IJL then determined the Milwaukee location underreported gross revenue, resulting in underpayment of royalty fees. While IJL continued to investigate underreporting, IJL Midwest requested an extension of its franchise agreements. IJL did not respond. IJL Midwest sued IJL for breach of contract and violations of multiple state franchise laws. IJL counterclaimed for breach of contract, breach of implied covenant of good faith and fair dealing, and declaratory judgment.

IJL moved for summary judgment on IJL Midwest’s claims. First, IJL argued that since IJL Midwest admitted to owing a large amount in fees, the court should determine the full amount of fees owed. IJL claimed it was owed over $1.1 million. Second, IJL argued that claims by IJL Midwest that IJL intended to cancel the franchise agreements was speculative and unripe for judgment.

The court granted summary judgment in part, holding IJL Midwest owed IJL $278,117, because it admitted owing that amount. The court held that any amount sought in excess of $278,117 had to be determined by a trier of fact. The court found IJL had not taken action to terminate or non-renew the franchise agreements, therefore, IJL Midwest’s claims regarding IJL’s future intent was speculative.

Franchisors should work with experienced counsel if a franchisee in default asks to renew the franchise agreement. In this case the argument was made that the franchisor’s nonresponse indicated intent to terminate or nonrenew. Counsel was able to show the court that the franchisor’s nonresponse to the franchisee’s renewal request did not show such intent.

Franchisee 101: Don’t Mess With Forum Selection Clauses

A federal district court in California granted a franchisor’s motion to transfer venue of claims brought by non-California franchisees to Texas. The ruling was based on a forum selection clause in the franchise agreements. But the court denied the motion as to a California franchisee. The court ruled that with regard to a California franchisee, the forum clause was void.

Franchisees of OsteoStrong, a bone density improvement business, alleged the franchisor misrepresented and omitted information to get them to enter into franchise agreements. Each franchise agreement had an identical forum selection clause, requiring any action against the franchisor to be brought in the Southern District of Texas or Harris County, Texas. The franchisees sued in California federal court. The franchisor sought to transfer the case to Texas, based on the forum selection clause.

California law states that forum selection clauses in franchise agreements which set venue in a state other than California are unenforceable for claims under a franchise agreement. The statute applies only to franchisees residing or operating in California. Thus, the court found the forum selection clause was unenforceable against the California franchisee. But the California statute did not apply to the other franchisees since they resided outside California or operated their businesses in a different state.

The court determined that transfer of all non-California franchisees to a Texas court was appropriate. First, the court found that access to evidence favored transfer, because the franchisor is in Texas and the evidence sought in the lawsuit would be more easily accessible. Second, the court determined that because a similar lawsuit involving several of the same franchisees had already been filed in the Southern District of Texas, it made sense for the case to be in Texas. Third, the court found that a Texas court would have an interest in the outcome of the case, because the franchisor is Texas-based. Fourth, the court found that the California court was more congested than its Texas counterpart and resolution could likely happen earlier than if the case stayed in California. The court also ordered the California franchisee to show cause why the case should stay in California, while the other franchisees’ cases were transferred to Texas.

Franchisees should work with franchise counsel before filing a lawsuit against their franchisor to assess proper venue for the suit and whether or not the franchisor’s forum selection clause is enforceable under state law.

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