Forum-selection clauses matter in franchise disputes — especially in disputes venued in federal court. Just ask Williams Insurance & Consulting, Inc., a franchisee recently booted from its chosen forum in a lawsuit it brought against its franchisor, alleging unlawful termination of the franchise agreement. Williams’ misfortune provides an important lesson for franchisors and manufacturers alike: Federal courts are not necessarily bound by state legislatures’ decisions to void forum-selection clauses in franchise or distribution agreements, and that fact alone makes removal to federal court worth serious consideration. Unfortunately for Williams, its franchisor understood this and parlayed its decision to remove the lawsuit from Michigan state court into a successful motion to dismiss in federal court, sending Williams’ lawsuit back to square one.
Issue / Case Summary
Williams sued its franchisor, Goosehead Insurance Agency, LLC for, among other things, improperly terminating the parties’ franchise agreement. Williams Insurance & Consulting, Inc. v. Goosehead Insurance Agency, L.L.C., 533 F. Supp. 3d 555, 556 (E.D. Mich. 2020). Williams originally filed suit in Oakland County Circuit Court, but Goosehead removed the case to the Eastern District of Michigan. On the heels of removal, Goosehead moved to dismiss, pointing to and relying wholly on a forum-selection clause in the franchise agreement. The clause required that “any action” brought against Goosehead had to be brought in Goosehead’s home “state and judicial district” in Texas. Williams countered by arguing that “Michigan statutory law render[ed] the forum-selection clause void and unenforceable.” More specifically, Williams pointed to the Michigan Franchise Investment Law’s prohibition on forum-selection clauses in franchise agreements, which renders void any “provision requiring that arbitration or litigation be conducted outside [of Michigan].”
Goosehead’s strategic removal decision proved very wise, as the court recognized that “[i]n a diversity suit, the enforceability of the forum selection clause is governed by federal law,” not by state law. As a result, the “party opposing the forum selection clause [i.e., Williams] bears” the burden of proof, and “a forum selection clause should be upheld absent a strong showing that it should be set aside.” The court applied the Sixth Circuit’s three-part test for evaluating the enforceability of a forum-selection clause and concluded that Williams hadn’t carried this heavy burden. On that basis, the court dismissed Williams’s suit without prejudice.
The lessons from this case are simple but important:
1. Even in the face of hostile state laws, manufacturers and franchisors may still use forum-selection clauses to exercise some measure of control over the forum of potential litigation. There’s no guarantee the clause will be enforced, but a clear majority of circuits — the Seventh and Tenth notwithstanding — apply federal law to questions regarding the enforceability of forum-selection clauses. And the common understanding under federal law is that these provisions are prima facie valid and should be enforced unless unreasonable under the circumstances.
2. Attorneys must know that in most federal courts forum-selection clauses are presumptively enforceable. Deciding against removal of an action filed against your franchisor or manufacturer client in an unfavorable state-court forum could cost your client its opportunity to enforce a forum-selection clause.
3. All of this being said, forum-selection clauses are not unassailable under federal law. But defense attorneys unhappy with a state-court forum and facing a statutory prohibition on forum-selection clauses should still strongly consider whether a federal-court forum provides a more welcoming venue to assert the enforceability of a forum selection.