Franchise 101: Inhospitable Forum Selection Clause; and Strong Releases Protect Fitness Franchisor

FRANCHISOR 101: Inhospitable Forum Selection Clause

A hotel franchisee brought a class action lawsuit in Louisiana federal court on behalf of Louisiana franchisees. The franchisor moved to transfer the action to Georgia, based on the mandatory forum selection clause in the franchise agreement. The Court granted the franchisor’s motion.

The franchisee accused the franchisor of coercing franchisees into anti-competitive programs, charging arbitrary and unreasonable fees and discriminating against Asian-American franchisees.

In the forum selection clause: (1) the franchisee agreed to the non-exclusive jurisdiction of the U.S. District Court in Georgia (Atlanta Division) and state Courts of Dekalb County, Georgia for all disputes; (2) the franchisor retained the right to seek injunctive relief in federal or state courts in Georgia or the state of the franchised hotel’s location or the franchisee’s principal place of business; and (3) a suit by the franchisee had to be in the “courts identified above.” The franchisee challenged the scope of the forum selection clause under the third prong.

The Court agreed with the franchisee [Park 80 Hotels LLC, et al. v. Holiday Hospitality Franchising LLC, et al., Case No. 21-cv-974 (E.D. La. Nov. 9, 2021)] that the clause was ambiguous because its language allowed forums in multiple states. However, applying Georgia law of contract interpretation, the Court construed the clause to permit all terms to be consistent with one another. The Court rejected the franchisee’s view that it could sue in the state where the hotel was located, in this instance, Louisiana. The franchisor’s “retention of rights” to seek injunctive relief in other courts would be superfluous if there were no restrictions on courts where actions could be filed by franchisees.

The Court also rejected the franchisee’s argument that the forum selection clause was invalid because it barred the franchisee from suing in Louisiana. The Court ruled that the language saying the forum selection clause will not be a waiver of the franchisee’s rights “under any applicable franchise law of the state in which the Hotel is located” did not apply because Louisiana permits forum selection clauses which do not reserve a right to sue in Louisiana.

Franchisors and franchisees should consult franchise counsel to determine applicability of a contract’s forum selection clause. Franchise agreements often have mandatory forum selection clauses. These may be valid, or void, enforceable, or unenforceable, lawful or unconscionable, depending on the state where the franchisee and/or franchised business is located, and applicable circumstances, particularly where and when the agreement was entered into.

FRANCHISEE 101: Strong Releases Protect Fitness Franchisor

A franchisee sued its franchisor, OsteoStrong Franchising, LLC, in Texas federal court after OsteoStrong terminated the franchise and development agreements. Termination occurred after the franchisee failed to timely develop and open additional locations pursuant to two development agreements. The Court granted partial summary judgment in favor of OsteoStrong. The Court ruled that releases signed by the individual owners of the franchisee bound the franchisee’s individual owners and their corporate entities, and that the releases barred most claims.

The franchise relationship began in June 2013. In November 2015, the franchisee entered into a development agreement to open more locations in New Mexico. In December 2017, the franchisee entered into a regional development agreement to open locations in Colorado. The franchisee did not meet the schedules under the development agreements. OsteoStrong terminated all agreements in April 2018.

The franchisee claimed fraud and breach of contract, alleging that OsteoStrong omitted material information from its FDDs, including an executive’s bankruptcy and criminal conviction. The franchisee claimed to have been fraudulently induced to enter into the franchise agreement and later, the development agreements based on OsteoStrong’s false promises of training.

The 2015 and 2017 development agreements each had releases, with the franchisee releasing and waiving all claims against OsteoStrong. The Court found the releases valid and unambiguous, and rejected the franchisee’s argument that they were limited to the individual owners of the franchisee and not applicable to any corporate entities [Simpson, et al. v. OsteoStrong Franchising, LLC, Case No. 19-H-2334 (S.D. Tex. Nov. 18, 2021)]. The Court found the individual franchisee acted as agent for each corporate entity and therefore bound the companies.

The franchisee argued the agreements and releases were impacted by fraudulent inducement and misrepresentation, claiming this voided the releases and contracts. The Court dismissed the franchisee’s claim of being induced to buy the franchise and enter into development agreements based on false promises of training. The Court found (a) the franchisee did not present any documentary evidence of an express promise to train and (b) evidence established OsteoStrong made themselves available to the franchisee.

The Court allowed the negligent misrepresentation claim to proceed, finding it was not ripe for summary judgment. The Court found evidence showing OsteoStrong did not intentionally omit material information from the FDDs with intent to fraudulently induce the franchisee. But the Court found disputed facts whether the franchisee relied on the FDDs, as one owner of the franchisee entity testified, he would not have entered into any franchise agreement had he known the omitted information.

Franchisees are often asked during the franchise relationship, upon renewal, as part of a transfer, or under some other circumstances – to sign releases of claims against the franchisor. Franchisees should consult franchise counsel to understand what rights and claims they may give up in signing a release so that this can be considered in weighing the benefit of whatever opportunity is being considered.

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