As I discussed in a recent article, it is a challenge to overcome venue selection terms in franchise agreements. Yet, the following recently issued decision illustrates just how such a clause may be nullified by a franchisee.
FRANCHISE AGREEMENT LAWSUIT
Here is a brief summary of the facts and issues before the Court, followed by its decision on the motion:
The franchisee was involved in two lawsuits with its franchisor. In the first action, franchisee joined several other franchisees in suing the franchisor in Washington State, which was the jurisdiction called-out in the franchise agreement for dispute resolution. That suit involved allegations of the franchisor having induced franchisees to purchase Papa Murphy’s franchises through various fraudulent and deceptive misrepresentations and omissions.
The franchisee then filed a second action against the franchisor in Arkansas, where most of its pizza stores were located. In this lawsuit the franchisee alleged that the franchisor had attempting to wrongfully terminate its franchise in retaliation for the Washington lawsuit.
Predictably, the franchisor filed a motion in the Arkansas Federal District Court seeking to change venue to Washington State, per the terms of the parties’ agreement. Yet, the Federal District refused to do so. The Court did note that under federal law, “[f]orum selection clauses are prima facie valid and are enforced unless they are unjust or unreasonable or invalid for reasons such as fraud or overreaching.” However, this precedent must be weighed against the public policy of the forum state, Arkansas.
STATUTE TO PROTECT FRANCHISE RESTAURANT OWNERS
The franchisee’s trump card was the existence of a state statute enacted to protect franchisee restaurant owners. The statute, known as the Arkansas Procedural Fairness for Restaurant Franchisees Act, prescribes that “a party to a restaurant franchise may commence a civil action . . . in Arkansas if either party to the restaurant franchise is a resident of Arkansas…” Further, the act can not be circumvented by franchise contract terms designating a venue outside of Arkansas for dispute resolution. So long as either party was a resident of Arkansas and their franchise was a restaurant business, the venue terms of the agreement were unenforceable.
Therefore, the Court denied the franchisor’s motion and held, “Arkansas public policy clearly and strongly weighs against enforcement of the forum selection clauses at issue, and accordingly this Court finds them unenforceable.”
Citation: Pizza v. Papa Murphy’s Int’l, United States District Court for the Western District of Arkansas, Fayetteville Division, June 24, 2015, Decided; June 24, 2015, Filed, CASE NO. 5:15-CV-5090.
BE ADVISED that these comments are not intended as legal opinions and are not to be relied upon as legal advice. If you need legal advice, or a referral to a business consultant, please contact us to discuss the specifics of your franchise business.
© KilcommonsLaw, P.C. 2015