Court Watch

Forum-Selection Clauses Enforced

A few recent decisions have again tackled the question of whether a choice of forum clause will be enforced contrary to arguments that enforcement is prohibited by state franchise protections laws. The fitness industry seems somewhat prone to having such provisions.

In Luv2Bfit, Inc. v. Curves, International, CCH Bus. Franchise Guide 13,996 (S.D.N.Y., Sept. 29, 2008), the court was faced with forum-selection clauses in a number of franchise agreements designating either the Western District of Texas or the state or forum where the franchisor's principal place of business was located as the appropriate forum for litigation. The franchisees sued in federal court in New York with the hope of invoking the New York Franchise Sales Act (“NYFSA”) to protect their venue selection. The franchisor moved to dismiss for improper venue, or to transfer to Texas based on forum non-conveniens.

The franchisees argued that such a forum-selection provision was unenforceable because it violated the “anti-waiver” provision contained in the NYFSA that voided any provision in a franchise agreement requiring a franchisee to “waive compliance with any provision of this law, or rule promulgated hereunder '” ('687.4, NYFSA). Unfortunately for the franchisees, they pointed to no specific provision in the NYFSA that required litigation to be maintained in New York. The court therefore found the forum-selection clauses to be enforceable because they did not have the effect of contracting out any liability of the franchisor for franchise violations.

Some states have provisions that can be read as requiring litigation involving the relevant franchise act to be maintained in that state and therefore preclude enforcement of forum selection clauses. See, e.g. Pepe v. GNC Franchising, Inc., 750 A.2d 1167 (Conn. Super. Ct. 2000) (applying Connecticut's anti-wavier law, which specified that franchisees could bring suit in Connecticut); California Franchise Relations Act, Cal. Bus & Prof. Code '20040.5). The New York court did not dismiss the case based on the forum-selection clause, but it considered whether it should be transferred on the grounds of forum non-conveniens. It acknowledged that the forum-selection clause should be given great weight but was not determinative. Once the clause was found valid, however, the burden shifted to the franchisees to show why it should not be enforced. The court discounted the franchisees' argument that it would be inconvenient and expensive for them to litigate in Texas, noting that it is just as inconvenient to the other party to litigate in New York. It also discounted any argument that relied on the location of documents, since faxing and scanning neutralize any concerns. The primary factor for the court was the “locus of operative facts,” which it also found to be neutral since New York and Texas both had contact with the operative facts.

Interestingly, the court did find that since New York franchise law would apply, it weighed in the franchisee's favor that the case be decided by a New York judge. The defendant was able to offset this by pointing out that other cases pending in Texas would reduce wastefulness of time, energy, and money. When all was said and done, the court ordered transfer to Texas based on the great weight to be given to the forum-selection clause.

Meanwhile, in the Northwest, another federal court enforced a forum-selection clause over the objections of the franchisee that relied on the New Jersey Franchise Practices Act (“NJFPA”). In Anytime Fitness, Inc. v. Reserve Holdings, LLC, CCH Bus. Franchise Guide 14,012 (D.Minn., Sept. 12, 2008), the franchisor terminated the franchise agreement and sued the franchisee in Minnesota, based on a forum-selection clause, to enforce the post-termination provisions of the franchise agreement. The franchisee moved to dismiss on the ground that the Minnesota forum-selection clause was invalid under the NJFPA as interpreted in Kubis & Perszyk Assocs., Inc. v. Sun Microsystems, Inc., 680 A.2d 618 (N.J. 1996), which held that forum-selection clauses were in violation of the NJFPA. The franchisee was a New Jersey company doing business in New Jersey, and moved to dismiss for improper venue.

It would seem that the franchisee's argument had a chance of succeeding before the Minnesota court based in Kubis. Surprisingly, the Minnesota court ruled that the forum-selection clause was enforceable and that Kubis did not apply because no claim had been brought by the franchisee under the NJFPA. This holding is somewhat surprising because the franchisee did not bring the case in the first place, and was thus not in a position to bring any claims. In fact, if it had brought any claims as counterclaims based on the NJFPA, it is possible that the court would have ruled that the objections to improper venue had been waived. So, this is a “Catch-22″ situation for a franchisee that is found in the position of a defendant in attempting to invalidate a forum-selection clause.

'No-Reliance' Clauses Alive and Well in the Seventh Circuit

So-called “no reliance” clauses are common in franchise and distribution agreements, as well as in many other forms of written agreements. The principal purpose of these provisions is to provide certainty in contracts and to preclude claims that the parties agreed to terms not otherwise contained in the written agreement. Notwithstanding their prevalence, no-reliance provisions are often ignored or disregarded by courts. These provisions, however, are alive and well in the Seventh Circuit, as evidenced by a recent split decision authored by Judge Richard Posner affirming an Illinois District Court's granting of summary judgment to a manufacturer on the basis of such a clause.

The facts in Extra Equipamentos E Exportacao LTDA v. Case Corporation, Bus. Franchise Guide (CCH) 13,975 (7th Cir. Sept. 3, 2008) are somewhat convoluted. Case is a U.S.-based manufacturer of farm and construction equipment. Case Brasil & Cia is a wholly owned subsidiary of Case and is based in Brazil. Extra (a Brazilian distributor) entered into an agreement with Case Brasil to distribute Case's products in Brazil. Extra subsequently filed suit against Case Brasil in a Brazilian court alleging that Case Brasil was overcharging Extra. Thereafter, Extra and Case Brasil entered into a “release of claims and settlement of certain obligations” agreement (“the release”). The release was negotiated and signed in Illinois by Extra's president and a vice president of Case on behalf of Case Brasil. No one employed by Case Brasil participated in the negotiations or signed the release.

As part of the release, Case Brasil agreed that it would seek no more than $2 million in past-due payments purportedly owed by Extra. Extra claimed that Case also orally agreed that Case Brasil would retain Extra as a distributor in good standing. In exchange, Extra agreed to, among other things, dismiss its lawsuit against Case Brasil.

Extra performed its obligations as required by the release. However, shortly after the release was signed, Case Brasil terminated Extra as a distributor, claiming that it had not authorized Case to enter into the release on its behalf and was not bound by it. In response, Extra filed another lawsuit against Case Brasil in Brazil. Extra also filed a lawsuit against Case in Illinois District Court claiming that Case (not Case Brasil) fraudulently induced Extra into entering into the release which it had no intention of fulfilling (indeed, could not fulfill, as evidenced by Case Brasil's subsequent termination of Extra as a distributor).

Case filed a motion for summary judgment on the ground that Extra could not establish reliance ' a necessary element of a fraud claim ' due to the no-reliance clause. The district court granted Case's motion, and Extra appealed to the Seventh Circuit.

In affirming the district court's decision, Posner delved into the complex relationship between basic contract law, (including the application of the parol evidence rule, integration clauses, and issues of contract interpretation) and fraud claims related to or arising out of a written contract. Posner noted that fraud claims are frequently asserted in an effort to circumvent the parol evidence rule and to vary the express terms of a written agreement on the basis of oral statements allegedly made before the agreement was entered into, and that no-reliance clauses are intended to defeat such end runs.

Extra did not claim that it did not understand the no-reliance clause or was somehow defrauded regarding the meaning of this clause. Rather, Extra claimed that the no-reliance clause was not applicable because its fraud claims were based on representations made by Case (not Case Brasil nor any person representing it).

In rejecting Extra's claims, Posner noted the inherent inconsistency in what Extra was alleging and the relief it was seeking. Extra could not claim that the individual who had signed the agreement on behalf of Case Brasil lacked actual or apparent authority in that such an argument would, if successful, render the release unenforceable, and Extra actually wanted to obtain the benefits specifically agreed to in the release (e.g., the $2 million cap on the amounts owed to Case Brasil). Thus, Case Brasil was compelled to argue that the allegedly fraudulent representations were actually made on behalf of Case (not Case Brasil), even though the release was specifically signed on behalf of Case Brasil. Posner was not impressed with Extra's arguments and characterized it as “wordplay.” Posner concluded that the no-reliance clause applied and made Extra's claimed reliance on the purported oral misrepresentations unreasonable as a matter of law. Judge Kenneth F. Ripple concurred in the majority's decision affirming the summary judgment as to Extra's fraud claim, but he dissented as to its holding regarding Extra's promissory fraud claim. Ripple was of the view that a promissory fraud claim in which the underlying promise or representation of future conduct is alleged to be the scheme employed to accomplish the fraud survives a no-reliance clause.

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Charles G. Miller and C. Griffith Towle are members of Bartko, Zankel, Tarrant & Miller in San Francisco. They can be reached by phone at 415-956-1900.

Forum-Selection Clauses Enforced

A few recent decisions have again tackled the question of whether a choice of forum clause will be enforced contrary to arguments that enforcement is prohibited by state franchise protections laws. The fitness industry seems somewhat prone to having such provisions.

In Luv2Bfit, Inc. v. Curves, International, CCH Bus. Franchise Guide 13,996 (S.D.N.Y., Sept. 29, 2008), the court was faced with forum-selection clauses in a number of franchise agreements designating either the Western District of Texas or the state or forum where the franchisor's principal place of business was located as the appropriate forum for litigation. The franchisees sued in federal court in New York with the hope of invoking the New York Franchise Sales Act (“NYFSA”) to protect their venue selection. The franchisor moved to dismiss for improper venue, or to transfer to Texas based on forum non-conveniens.

The franchisees argued that such a forum-selection provision was unenforceable because it violated the “anti-waiver” provision contained in the NYFSA that voided any provision in a franchise agreement requiring a franchisee to “waive compliance with any provision of this law, or rule promulgated hereunder '” ('687.4, NYFSA). Unfortunately for the franchisees, they pointed to no specific provision in the NYFSA that required litigation to be maintained in New York. The court therefore found the forum-selection clauses to be enforceable because they did not have the effect of contracting out any liability of the franchisor for franchise violations.

Some states have provisions that can be read as requiring litigation involving the relevant franchise act to be maintained in that state and therefore preclude enforcement of forum selection clauses. See, e.g. Pepe v. GNC Franchising, Inc. , 750 A.2d 1167 (Conn. Super. Ct. 2000) (applying Connecticut's anti-wavier law, which specified that franchisees could bring suit in Connecticut); California Franchise Relations Act, Cal. Bus & Prof. Code '20040.5). The New York court did not dismiss the case based on the forum-selection clause, but it considered whether it should be transferred on the grounds of forum non-conveniens. It acknowledged that the forum-selection clause should be given great weight but was not determinative. Once the clause was found valid, however, the burden shifted to the franchisees to show why it should not be enforced. The court discounted the franchisees' argument that it would be inconvenient and expensive for them to litigate in Texas, noting that it is just as inconvenient to the other party to litigate in New York. It also discounted any argument that relied on the location of documents, since faxing and scanning neutralize any concerns. The primary factor for the court was the “locus of operative facts,” which it also found to be neutral since New York and Texas both had contact with the operative facts.

Interestingly, the court did find that since New York franchise law would apply, it weighed in the franchisee's favor that the case be decided by a New York judge. The defendant was able to offset this by pointing out that other cases pending in Texas would reduce wastefulness of time, energy, and money. When all was said and done, the court ordered transfer to Texas based on the great weight to be given to the forum-selection clause.

Meanwhile, in the Northwest, another federal court enforced a forum-selection clause over the objections of the franchisee that relied on the New Jersey Franchise Practices Act (“NJFPA”). In Anytime Fitness, Inc. v. Reserve Holdings, LLC, CCH Bus. Franchise Guide 14,012 (D.Minn., Sept. 12, 2008), the franchisor terminated the franchise agreement and sued the franchisee in Minnesota, based on a forum-selection clause, to enforce the post-termination provisions of the franchise agreement. The franchisee moved to dismiss on the ground that the Minnesota forum-selection clause was invalid under the NJFPA as interpreted in Kubis & Perszyk Assocs., Inc. v. Sun Microsystems, Inc ., 680 A.2d 618 (N.J. 1996), which held that forum-selection clauses were in violation of the NJFPA. The franchisee was a New Jersey company doing business in New Jersey, and moved to dismiss for improper venue.

It would seem that the franchisee's argument had a chance of succeeding before the Minnesota court based in Kubis. Surprisingly, the Minnesota court ruled that the forum-selection clause was enforceable and that Kubis did not apply because no claim had been brought by the franchisee under the NJFPA. This holding is somewhat surprising because the franchisee did not bring the case in the first place, and was thus not in a position to bring any claims. In fact, if it had brought any claims as counterclaims based on the NJFPA, it is possible that the court would have ruled that the objections to improper venue had been waived. So, this is a “Catch-22″ situation for a franchisee that is found in the position of a defendant in attempting to invalidate a forum-selection clause.

'No-Reliance' Clauses Alive and Well in the Seventh Circuit

So-called “no reliance” clauses are common in franchise and distribution agreements, as well as in many other forms of written agreements. The principal purpose of these provisions is to provide certainty in contracts and to preclude claims that the parties agreed to terms not otherwise contained in the written agreement. Notwithstanding their prevalence, no-reliance provisions are often ignored or disregarded by courts. These provisions, however, are alive and well in the Seventh Circuit, as evidenced by a recent split decision authored by Judge Richard Posner affirming an Illinois District Court's granting of summary judgment to a manufacturer on the basis of such a clause.

The facts in Extra Equipamentos E Exportacao LTDA v. Case Corporation, Bus. Franchise Guide (CCH) 13,975 (7th Cir. Sept. 3, 2008) are somewhat convoluted. Case is a U.S.-based manufacturer of farm and construction equipment. Case Brasil & Cia is a wholly owned subsidiary of Case and is based in Brazil. Extra (a Brazilian distributor) entered into an agreement with Case Brasil to distribute Case's products in Brazil. Extra subsequently filed suit against Case Brasil in a Brazilian court alleging that Case Brasil was overcharging Extra. Thereafter, Extra and Case Brasil entered into a “release of claims and settlement of certain obligations” agreement (“the release”). The release was negotiated and signed in Illinois by Extra's president and a vice president of Case on behalf of Case Brasil. No one employed by Case Brasil participated in the negotiations or signed the release.

As part of the release, Case Brasil agreed that it would seek no more than $2 million in past-due payments purportedly owed by Extra. Extra claimed that Case also orally agreed that Case Brasil would retain Extra as a distributor in good standing. In exchange, Extra agreed to, among other things, dismiss its lawsuit against Case Brasil.

Extra performed its obligations as required by the release. However, shortly after the release was signed, Case Brasil terminated Extra as a distributor, claiming that it had not authorized Case to enter into the release on its behalf and was not bound by it. In response, Extra filed another lawsuit against Case Brasil in Brazil. Extra also filed a lawsuit against Case in Illinois District Court claiming that Case (not Case Brasil) fraudulently induced Extra into entering into the release which it had no intention of fulfilling (indeed, could not fulfill, as evidenced by Case Brasil's subsequent termination of Extra as a distributor).

Case filed a motion for summary judgment on the ground that Extra could not establish reliance ' a necessary element of a fraud claim ' due to the no-reliance clause. The district court granted Case's motion, and Extra appealed to the Seventh Circuit.

In affirming the district court's decision, Posner delved into the complex relationship between basic contract law, (including the application of the parol evidence rule, integration clauses, and issues of contract interpretation) and fraud claims related to or arising out of a written contract. Posner noted that fraud claims are frequently asserted in an effort to circumvent the parol evidence rule and to vary the express terms of a written agreement on the basis of oral statements allegedly made before the agreement was entered into, and that no-reliance clauses are intended to defeat such end runs.

Extra did not claim that it did not understand the no-reliance clause or was somehow defrauded regarding the meaning of this clause. Rather, Extra claimed that the no-reliance clause was not applicable because its fraud claims were based on representations made by Case (not Case Brasil nor any person representing it).

In rejecting Extra's claims, Posner noted the inherent inconsistency in what Extra was alleging and the relief it was seeking. Extra could not claim that the individual who had signed the agreement on behalf of Case Brasil lacked actual or apparent authority in that such an argument would, if successful, render the release unenforceable, and Extra actually wanted to obtain the benefits specifically agreed to in the release (e.g., the $2 million cap on the amounts owed to Case Brasil). Thus, Case Brasil was compelled to argue that the allegedly fraudulent representations were actually made on behalf of Case (not Case Brasil), even though the release was specifically signed on behalf of Case Brasil. Posner was not impressed with Extra's arguments and characterized it as “wordplay.” Posner concluded that the no-reliance clause applied and made Extra's claimed reliance on the purported oral misrepresentations unreasonable as a matter of law. Judge Kenneth F. Ripple concurred in the majority's decision affirming the summary judgment as to Extra's fraud claim, but he dissented as to its holding regarding Extra's promissory fraud claim. Ripple was of the view that a promissory fraud claim in which the underlying promise or representation of future conduct is alleged to be the scheme employed to accomplish the fraud survives a no-reliance clause.

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Charles G. Miller and C. Griffith Towle are members of Bartko, Zankel, Tarrant & Miller in San Francisco. They can be reached by phone at 415-956-1900.