Focused on Franchise Law - July 2014

by Lewitt Hackman
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Heard in Sacramento...
Tal Grinblat, as Vice Chair of Legislation for the Franchise Law Committee of the State Bar of California, was invited to Sacramento by the Department of Business Oversight to discuss Assembly Bill 2289. The bill aims to change the automatic effectiveness statue of the California Franchise Investment law. The DBO agreed to hear the Committee's concerns regarding potential delays for franchisors applying to register or renew franchises in California.
FRANCHISOR 101: Location of Dispute Clauses Will Be Enforced
A recent U.S. Supreme Court decision is having a big impact on the locations where franchisor-franchisee disputes are being resolved.

The Supreme Court's conservative-liberal divide is well known. Four of the Justices lean conservative: Chief Justice Roberts and Justices Thomas, Scalia and Alito. Four Justices tilt liberal in their rulings: Justices Ginsburg, Breyer, Sotomayoer and Kagan. Many outcomes hinge on the views of the remaining Justice, Kennedy. 

But the recent landmark decision was unanimous!  

Despite their wide range of political leanings, all nine Supreme Court Justices agreed.

Franchise Agreements often specify the state, county or city where disputes will be litigated. The case of Atlantic Marine Construction Co. v. U.S. District Court concerned such a clause.  A construction company, Atlantic Marine, entered into a contract with the Army to build a structure at Fort Hood in Texas, and a subcontract for a management company to work on the project. The subcontract said all disputes would be litigated in Virginia. But when a dispute arose, the management company sued in Texas. 

It has been a longtime practice among many lawyers to start lawsuits or arbitrations locally, or in a court of choice, regardless of what the parties' agreement says. Courts and arbitrators applied a variety of legal theories to avoid the contractually agreed location. But in Atlantic Marine, the Supreme Court said an agreement on where disputes will be resolved "represents the parties' agreement as to the most proper forum;" and "enforcement of valid forum-selection clauses, bargained for by the parties, protects their legitimate expectations and furthers vital interests of the justice system." 

Therefore, "a valid forum-selection clause should be given controlling weight in all but the most exceptional cases." 

The Atlantic Marine decision was announced just seven months ago, in December 2013. Already. It has dramatically affected many franchising cases. 

In just the few months since it was decided, published decisions show that Burger King was able to get a franchisee lawsuit moved to Burger King's home court in Florida, and other franchisors such as Country Inn & Suites, Hawthorne Suites and Salad Works were able to defeat franchisee efforts to relocate cases away from franchisor home courts.

A message for franchisors and franchisees is to pay careful attention to the location-for-dispute clauses in franchise agreements and other agreements. As one court stated:

"The decision in Atlantic Marine now provides the analytical framework a court should employ when a valid and enforceable forum selection clause exists between the parties."

This means those clauses in the franchise agreement are typically going to be enforced. Read the U.S. Supreme Court Decision: Atlantic Marine Construction Co., Inc. v. U.S. District Court for the Western District of Texas.  

FRANCHISEE 101: Think Carefully About Agreeing to Arbitration 

Another type of clause often appearing in Franchise Agreements (and other agreements) is an arbitration clause. Arbitration is a form of dispute resolution that is an alternative to going to court. 

In court, a case follows the court's rules and decisions are made by the judge or jury. Arbitration can be less formal, and decisions are made by a mutually agreeable arbitrator.

 

Arbitration comes with a significant risk. Most arbitration decisions are not reviewable or appealable. Even if an arbitrator makes a mistake in deciding a case, generally it cannot be appealed.

 

Recently a franchisee of Wetzel's Pretzels arbitrated a dispute with the franchisor. The franchisee, dissatisfied with the outcome, asked a court to vacate the arbitrator's decision. The franchisee claimed:

"The arbitrator exceeded his powers by enforcing certain provisions in the franchise agreement that required the [franchisee] to assign their lease and property interests to Wetzel's Pretzels after the franchise agreement was terminated."

 

The court would not consider the claim. Even if the arbitrator made a mistake, that would not be grounds. The court said:

 

"In order for us to vacate the award on the ground that the arbitrator exceeded his powers . . . the [Franchisees] would have to show that the award was "completely irrational, or exhibit[ed] a manifest disregard of law."

 

"Completely irrational" or "manifest disregard of the law" are very high, almost insurmountable standards to meet in trying to undo an arbitrator's decision.

A message from the recent Wetzel's Pretzel's decision is to think carefully before agreeing to arbitration of disputes.  Many courts have noted that the arbitration process cannot be expected to be error free. Agreeing to arbitration means agreeing to and accepting the risk of errors as part of the decision-making outcome; error that cannot be corrected.

 

Read the opinion here: Wetzel's Pretzels, LLC v. Johnson 

 

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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