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"A Not-So-Funny Thing Happened on the Way to the Forum"

02/01/2011

This is the 39th in a series of brief articles that Moye White is sending to its clients and friends to provide practical insights into opportunities and challenges in today's business and financial world.

Forum Selection Clauses May Be Barred in Some States

It is common practice for franchise agreements to include a clause stating that the franchisor and franchisee agree that any dispute between them will be settled in a specific legal forum or court. These “forum selection” clauses allow franchisors to enforce consistency, predictability, and reliability in disputes arising with franchisees, regardless of where they may be located across the country.

Although forum selection clauses are enforceable in most states, several states have specific statutes or judicial opinions that substantially limit or even overrule these clauses. Recently, Connecticut appears to have joined those states that deem forum selection clauses unreasonable and unenforceable.

On January 3, 2011, in Phoenix Surgicals, LLC v. Blackstone Medical, Inc. (2010 U.S. Dist. LEXIS 138043), the United States District Court for the District of Connecticut held that the Connecticut Franchise Act (“CFA”) barred enforcement of a forum selection clause contained in the litigants’ franchise agreement. The CFA contains an anti-forum selection clause, and the Court noted a line of cases supporting Connecticut having a “strong public policy…against the enforcement of forum selection clauses in franchise agreements.” The Court cited public policy concerns as the only relevant consideration in its analysis.

Even though the forum selection clause was a negotiated term in the franchise agreement, the Court found “[i]n light of the clear public policy of the CFA, the forum selection clause of the parties’ agreement is unenforceable by this Court because it is unreasonable.”

The ruling forced a franchisor to litigate claims filed by its franchisee under the CFA in Connecticut using Connecticut law, even though the franchise agreement expressly stated that such disputes were required to be litigated in Texas under Texas law.

The Court also found, however, that the plaintiff franchisee’s other claims (which were not based on the CFA) were governed by the terms of franchise agreement, and therefore should be tried in Texas under Texas law. The Court noted that if the plaintiff franchisee desired to have all of its claims tried together, it should do so in Texas “as contemplated by the parties’ agreement.”

It is crucial for franchisors to understand the potential risks of litigation or other franchisee disputes arising in states, such as Connecticut, that do not enforce forum selection clauses. This knowledge is essential for franchise systems considering growth strategies and plans for expansion across the country. Moye White has experienced attorneys who can evaluate franchise agreements and advise clients on issues relating to nationwide expansion and the enforceability of forum selection clauses.

For more information contact: Dean Richardson or Billy Jones at (303) 292-2900.

Moye White LLP has prepared this bulletin to provide general information; however this bulletin does not provide legal advice and does not create an attorney-client relationship between the reader and Moye White. No legal or business decision should be based solely on the content of this bulletin.

ABOUT THE AUTHOR

William F. Jones

Attorney

Dean Richardson

Vice Chair, Litigation Section

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