Franchisor 101: Forum Selection Clause Gone Wrong

Lewitt Hackman

[co-author: Caitlyn Dillon]
 
A California Court of Appeal held that courts should not enforce forum selection clauses in contracts that also contain a jury waiver. For franchisors that have California franchisees, this ruling could complicate the ability to litigate claims in their chosen forum.
 
The plaintiff operated a cigar store in California. Plaintiff sued the lessor of credit card processing equipment for fraud. The lease called for New York law to apply and required suits to be exclusively in New York state and federal courts. The lease also had a mutual waiver of trial by jury.
 
The suit was brought in California. The defendant moved to dismiss the case based on the agreement’s designation of New York as the place for lawsuits. The trial court granted defendant’s motion. The plaintiff appealed, arguing that enforcing the New York forum clause and New York choice of law would deprive him of his right to a jury trial. In California, pre-dispute jury waivers are void.
 
A forum selection clause is generally given effect. The party opposing enforcement of the clause has the burden to prove why it should not be enforced. In this case, the court ruled that when a claim concerns unwaivable rights under California law, the burden shifts to the party seeking to enforce the forum clause to show that litigating in the chosen forum will not reduce the other party’s California law rights. The appellate court held that California’s prohibition against pre-dispute jury waivers is an unwaivable right that can trigger a burden shift. The court found that the lessor failed to satisfy its burden because New York is willing to enforce a pre-dispute waiver of a party's right to jury trial.
 
In California, the Franchise Relations Act often protects franchisees in the state from clauses that would otherwise force them to file their claims in another state. The Act provides that a provision in a franchise agreement restricting the forum for litigation to another state is void. Franchisors with California franchisees and other types of forum selection clauses, as well as manufacturers and suppliers not subject to the Franchise Relations Act, should weigh the value of avoiding a California forum for lawsuits brought by California franchisees, distributors and customers, against the cost of giving up a jury trial waiver or selecting an alternative dispute resolution procedure, such as face-to-face meetings with the franchisor, non-binding mediation, or arbitration, in place of litigation.
 

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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