Focused on Franchise Law - December 2013



Franchisors entering into settlement agreements with current or former franchisees must be certain that the agreements give the franchisors the right to make required FDD disclosures without breaching the settlement agreements.


Leaders, LLC, a company owned by Jana Caudill, purchased a franchise from Keller Williams Realty, Inc., Caudill's former employer. After purchasing the franchise, Caudill filed a lawsuit against Keller Williams for claims arising from the termination of her employment, Keller Williams terminated Leaders' franchise agreement and Caudill amended her complaint to include a claim for wrongful termination of her franchise. In December 2012, the parties signed a confidential settlement agreement and mutual general release that, among other things, provided that they would keep the terms of the settlement, including the existence of the settlement, the allegations made by the parties in the lawsuit and the settlement amount paid by Keller Williams to Caudill and Leaders, in strict confidence and not disclose those terms to anyone "except to the parties' tax professionals [], insurance carriers, attorneys who represented  the parties in the lawsuit, [] and to governmental agencies or regulatory authorities, as required by law." The settlement agreement also contained a liquidated damages clause that required a party violating the confidentiality provision in the settlement agreement to pay the other party $10,000 per violation. After the settlement agreement was signed, the case was dismissed.


In March 2013, Keller Williams began to distribute its current Franchise Disclosure Document (FDD) that included the name of the case, a history of the litigation and the settlement amount. Caudill and Leaders filed suit in federal district court claiming Keller Williams breached the settlement agreement by disclosing the terms of the settlement agreement to prospective franchisees. Keller Williams argued that its disclosure did not amount to a breach of contract because Keller Williams was required under federal and state law to disclose the terms of the settlement in its FDD and that its failure to expressly include an exception in the settlement agreement for the FDD disclosure was merely a drafting error. The court disagreed and ruled that the franchisee's breach of contract claim was plausible on the facts presented and could proceed to trial.


Proper drafting of a settlement agreement with any current or former franchisees is critically important. The FTC Rule and registration states' guidelines require franchisors to disclose all material terms of a settlement arising from litigation involving the franchise relationship if, as a result of the settlement, the franchisor is required to pay money or other consideration, reduce any indebtedness, waive any of its rights, or take any action adverse to its interests. The drafting error proved to be a costly mistake for Keller Williams. To read the entire case, click here.



Now, more than ever, franchisees must carefully review and understand the forum selection clauses in their franchise agreements. The U. S. Supreme Court ruled in Atlantic Marine Construction Company v. United States District Court for the Western District of Texas, in a unanimous decision, that except in extraordinary circumstances, district courts must enforce valid forum selection clauses and transfer cases to the forums specified in the agreements, without regard to the convenience of the parties. Thus, disputes arising under franchise agreements will, more often than not, be tried in the forum selected by the franchisor.


Atlantic Marine Construction Co., a Virginia corporation, entered a Subcontractor Agreement with J-Crew Management, Inc., a Texas corporation, to help construct a child-development center at Fort Hood, Texas. The Agreement's forum-selection clause stated that all disputes between the parties would be litigated in Virginia. A dispute arose regarding payments, and J-Crew filed a complaint in a federal district court in Texas. Atlantic filed a motion to dismiss for improper venue or, in the alternative, to transfer the case to Virginia. The district court ruled that a transfer could only be granted if it was warranted based on the convenience of the parties and witnesses or in the interests of justice. After employing a balancing test and considering several factors relating to the convenience of the parties, the district court denied Atlantic's motion. Atlantic appealed, but the Fifth Circuit Court of Appeals agreed with the district court's interpretation of the law and affirmed its decision.


The Supreme Court then took the case and overruled the lower courts. It held that the interests of justice dictate that valid forum-selection clauses in contracts must be given controlling weight in determining whether a case should be transferred to the venue chosen by the parties when they entered into their agreement. When the contracting parties have not specified a forum and one party seeks to have a case transferred from one district court to another district court in which venue would have been proper, the court must consider the extensive balancing test employed by the Texas district court and "evaluate both the private interests of the parties and public-interest considerations." However, the court continued, "when the parties' contract contains a valid forum-selection clause, that clause represents their agreement as to the most proper forum, and should be given controlling weight in all but the most exceptional cases." The court further ruled that when a valid choice of law clause exists, the plaintiff's choice of forum carries no weight and the plaintiff must prove that transfer to the forum it bargained for in the agreement is unwarranted. Here, J-Crew was unable to do so. To read the entire case, click here.


Topics:  Franchise Agreements, Franchise Disclosure Document, Franchises, Keller Williams Realty

Published In: Civil Procedure Updates, General Business Updates, Franchise Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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