Where do franchise parties seek relief?If your franchise relationship hits the rocks, where do you go for relief? How do you even start the process?

The first step is always to review the Franchise Agreement. Why? Because the agreement will likely have terms requiring Alternative Dispute Resolution (i.e. mediation and/or arbitration), as well as identifying the state law to be applied, and choosing the jurisdiction with authority to hear and decide disputes, and finally, where the ADR will take place.

In what situations are you be able, or forced, to go to Court rather than to ADR? It’s complicated. This depends on the issue(s) in dispute, the terms of the Franchise Agreement, together with the state statutes and common law (court decisions) where your business is located.

For example, here is one common scenario: if the Franchisor has an issue with the manner in which the Franchisee is using its brand, or rather misusing it, or with the Franchisee continuing the business using Franchisor’s dress (signs/décor) after termination, then the Franchisor usually reserves itself the right in the contract to bring a lawsuit in the Franchisee’s jurisdiction to obtain an injunction (restraints) to stop the prohibited activities. This action safeguards the brand.

If you are a Franchisee and wish to keep a dispute with the Franchisor in New Jersey, you would likely file an action in the New Jersey Superior Court, Chancery Division, which is also referred to as the General Equity Court. In general, claims that do not involve monetary relief are assigned to the Chancery Division. Here, you would argue that the New Jersey law (and there is strong law supporting this position) requires that the dispute remain here and be decided by the New Jersey State Court. If the Court decides in favor of the Franchisee, and assuming money damages are the substance of the remedy sought, the case may then be assigned to the Law Division of the Superior Court for disposition. If the remedies sought are equitable in nature, then the Chancery Court would maintain jurisdiction.

These issues represent some of the thorniest legal matters attorneys deal with in their practices: jurisdiction and conflicts of law between states. To make it even more complicated, the federal courts are often involved due to the Federal Arbitration Act and the diversity of jurisdiction issue when the Franchisor and Franchisee reside in different states. For example, when a Franchisee files for relief in its state’s court, the Franchisor will often respond by filing an action in the nearest federal court and then filing an application with the state court to transfer the state action to the federal court.

The take away here is that you should not attempt to litigate these issues on your own. Get a litigator involved early-on whom understands franchise law and these courts.

BE ADVISED that these comments are not intended as legal opinions and are not to be relied upon as legal advice. If you need franchise-related legal advice, please contact us to discuss the specifics of your franchise business.

© KilcommonsLaw, P.C. 2019