Franchise 101: No Repairing Delayed Filing; and Forum Selection Clause is Just what the Doctor Ordered

Franchisor 101: No Repairing Delayed Filing

A New Jersey federal court denied a franchisor’s motion for preliminary injunction against a franchisee due to franchisor’s 11 month delay in bringing the motion. Franchisee entered into two franchise agreements with H-1 Auto Care, to operate in Mercerville and Flemington, New Jersey. In October 2020, the franchisee told H-1 he planned to close both locations and file for bankruptcy.

The parties agreed to terminate the Mercerville franchise agreement by November 30. The termination agreement said the non-compete and non-solicitation covenants in the franchise agreement would remain effective. The franchisee told H-1 that the Flemington location would close by December 31. Although H-1 agreed to terminate the Flemington franchise in December 2020, the franchisee continued to operate in Flemington as an H-1 Auto Care location, using the same phone number as the franchised business and calling customers to the new store, in violation of the non-compete provisions of the franchise agreement.

In January 2021, H-1 discovered the franchisee formed two entities to operate competing businesses at the previously franchised locations. Eleven months later, H-1 filed a lawsuit seeking an injunction and money damages against its former franchisee for using H-1’s business resources and employees to open competing businesses in violation of the franchise agreements.  H-1 sought a preliminary injunction.

The court limited its analysis to whether there was irreparable harm, which is required for a preliminary injunction. The court explained that H-1 needed to demonstrate irreparable harm by a clear showing of immediate irreparable injury and show that an injunction was the only way to protect H-1 from such harm. Because H-1 waited 11 months to seek the preliminary injunction after learning of franchisee’s competing businesses, with no effort to justify the delay, the court found the delay showed H-1’s anticipated injuries were not irreparable harm and therefore denied the motion.

Franchisors should consult counsel immediately on discovering a franchisee’s breach of any agreement to determine what action should be taken to preserve the franchisor’s rights.  Unnecessary delay in bringing suit may limit a franchisor’s available remedies.

H-1 Auto CARE LLC v. Lasher, Civil Action No. 21-18110 (ZNQ) (TJB), 2022 U.S. Dist. LEXIS 192328 (D.N.J. Oct. 21, 2022)

Franchisee 101: Forum Selection Clause is Just what the Doctor Ordered

A federal appellate court held that a forum selection clause requiring litigation to be in the jurisdiction where the franchisor’s principal place of business was located when the action was brought is enforceable.

A franchisee entered into a master developer agreement with franchisor, Doctors Express, to develop urgent-care centers in New York and Connecticut. Doctors Express was acquired by AFC Franchising, LLC, and the franchisee’s developer agreement was assigned to the new franchisor.

After the franchisee threatened to sue the franchisor in New York or Connecticut, the franchisor filed a lawsuit in Alabama seeking a declaration that (1) the parties had to litigate in Alabama due to the developer agreement’s forum selection clause requiring actions to be in the state where the franchisor had its principal place of business, and (2) that the franchisor did not breach the developer agreement.

The franchisee removed the action to federal court in Alabama and moved to dismiss for lack of personal jurisdiction and improper venue, asking to transfer the case to Connecticut, where the franchisee already sued the franchisor. The franchisee argued that the forum selection clause only referred to the principal place of business of the former franchisor, Doctors Express. The successor franchisor, however, argued that the clause now meant the current franchisor’s principal place of business because it acquired all Doctors Express’ rights and obligations under the developer agreement. The court agreed, holding that because the developer agreement let Doctors Express assign the agreement to a third party, the forum selection clause would allow the current franchisor to litigate in the state where its principal place of business was located.

The court also held that the franchisee did not show that enforcing the forum selection clause would be unreasonable or unjust. In entering into the developer agreement, the franchisee voluntarily agreed to the forum selection clause and this waived his right to contest personal jurisdiction.

Franchisees should consult with counsel before entering into a franchise or development agreement to determine which agreement provisions may adversely affect the franchisee, such as a forum selection clause requiring litigation in a state where the franchisee is not a resident, which may increase a franchisee’s litigation costs.

AFC Franchising, LLC v. Purugganan, 43 F.4th 1285 (11th Cir. 2022)




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