Franchisor 101: Inhospitable Forum Selection Clause

Lewitt Hackman

A hotel franchisee brought a class action lawsuit in Louisiana federal court on behalf of Louisiana franchisees. The franchisor moved to transfer the action to Georgia, based on the mandatory forum selection clause in the franchise agreement. The Court granted the franchisor’s motion.

The franchisee accused the franchisor of coercing franchisees into anti-competitive programs, charging arbitrary and unreasonable fees and discriminating against Asian-American franchisees.

In the forum selection clause: (1) the franchisee agreed to the non-exclusive jurisdiction of the U.S. District Court in Georgia (Atlanta Division) and state Courts of Dekalb County, Georgia for all disputes; (2) the franchisor retained the right to seek injunctive relief in federal or state courts in Georgia or the state of the franchised hotel’s location or the franchisee’s principal place of business; and (3) a suit by the franchisee had to be in the “courts identified above.” The franchisee challenged the scope of the forum selection clause under the third prong.

The Court agreed with the franchisee [Park 80 Hotels LLC, et al. v. Holiday Hospitality Franchising LLC, et al., Case No. 21-cv-974 (E.D. La. Nov. 9, 2021)] that the clause was ambiguous because its language allowed forums in multiple states. However, applying Georgia law of contract interpretation, the Court construed the clause to permit all terms to be consistent with one another. The Court rejected the franchisee’s view that it could sue in the state where the hotel was located, in this instance, Louisiana. The franchisor’s “retention of rights” to seek injunctive relief in other courts would be superfluous if there were no restrictions on courts where actions could be filed by franchisees.

The Court also rejected the franchisee’s argument that the forum selection clause was invalid because it barred the franchisee from suing in Louisiana. The Court ruled that the language saying the forum selection clause will not be a waiver of the franchisee’s rights “under any applicable franchise law of the state in which the Hotel is located” did not apply because Louisiana permits forum selection clauses which do not reserve a right to sue in Louisiana.

Franchisors and franchisees should consult franchise counsel to determine applicability of a contract’s forum selection clause. Franchise agreements often have mandatory forum selection clauses. These may be valid, or void, enforceable, or unenforceable, lawful or unconscionable, depending on the state where the franchisee and/or franchised business is located, and applicable circumstances, particularly where and when the agreement was entered into.

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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