Franchisees Beware Venue Clauses

Franchise contracts almost always contain clauses stipulating the venue wherein legal disputes will be held and franchisors will always choose a venue that favors them. This can make things very difficult for a franchisee that has to make a choice between challenging the franchisor and paying monies to travel to the location and face an unfamiliar arbitration board or forgoing the challenge because it is too difficult and costly. Franchisors routinely stack the deck in their favor in this way, which is why many franchisee advocates insist on legislation the levels the playing field between franchisees and franchisors. For more on this continue reading the following article from Blue MauMau. 

Most franchise agreements provide for venue of franchise lawsuits in the home state of the franchisor. In football terms this is called home field advantage. National Football League teams spend the entire regular season jousting for home field in the playoffs with the Seattle Seahawks boasting that they have the most boisterous home field advantage. But franchising lawsuits are too important to give franchisors an unfair forum advantage. Franchisees usually have their life savings and livelihoods on the line in any litigation with their franchisors.

How big of an advantage is home state venue for franchisors?

Imagine a Hawaiian franchisee, in financial distress and seeking relief to avoid termination, but having her case heard in the franchisor’s home state of Florida. She must now locate additional counsel in the franchisor’s state. She then must also pay to travel to Florida for preliminary injunctions, discovery motions and trials. Plus she must pay to fly her witnesses from her business to the mainland and beyond for trial. Like many franchisees faced with such clauses and distant expensive litigations, she may have no choice but to give up because she cannot afford to litigate across the country.

Bleeding a franchisee from the dispute get-go

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Here is the existing California Franchise Relations Act Provision: Section 20040.5: A provision in a franchise agreement restricting venue to a forum outside this state is void with respect to any claim arising under or relating to a franchise agreement involving a franchise business operating within this state. Here is a typical franchise agreement venue provision: Venue and Jurisdiction. All arbitration hearings will take place exclusively in Miami, Florida. Any other legal proceeding involving any dispute between the parties must be venued exclusively and solely in federal or state court in Miami, Florida. Franchisor and Franchisee and their respective officers, directors and shareholders, partners and personal guarantors acknowledge that Franchisee and its officers, directors and employees have had substantial business and personal contacts with Franchisor in Florida, do hereby agree and submit to personal jurisdiction in Florida, and hereby waives any rights they may have to contest venue and jurisdiction in Florida and any claims that the venue and jurisdiction in Florida are invalid.

Often such out of state forum selection clauses are routinely enforced unless the franchisee establishes that the clause is unconscionable. But this is a heavy burden and, if not met, reduces the franchisee to an unfair battle in a distant forum. The problem is even more extreme in cases involving out of state forum clauses embedded in arbitration clauses. The United States Supreme Court has held that federal policy of enforcing arbitration agreements generally mandates full enforcement of such clauses. The result: a franchise will face mandatory arbitration in the out of state venue coupled with expensive administrative and arbitrator fees.

Subway, through its franchise agreements has blazed a trail of litigation to enforce its mandatory arbitration clauses in Connecticut. Subway franchisees either must give up or pay substantial arbitration fees for arbitration hearings in Connecticut. And those that chose to travel to Connecticut will have their claims heard in a private forum where their franchisor knows the arbitration panels and arbitrators and the results of prior arbitrations. Franchisees will usually not know this information.

Franchisees usually cannot afford to cross the country to fight their claims let alone pay arbitration filing fees and arbitrator fees. They give up and cannot fight their termination or bring damages claims. Of course that is the franchisor’s objective all along. Instead franchise agreement provisions providing out of state venue should be void. Fortunately several state franchise statutes already declare provide this as the law. Indeed franchisors who come into a state and authorize franchisees to do business in the state, under its laws and economy, ought to be willing stand trial for alleged transgressions in that state. It is only fair.

This article was republished with permission from Blue MauMau.