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April 2011

New Jersey Franchise Group Defeats Motion to Dismiss and Wins Forum Selection Dispute

Franchise Practice Co-Chair Ronald A. Giller and Associate Elior D. Shiloh of the New Jersey office defeated a franchisee's motion to dismiss our client's action in a U.S. District Court case involving enforcement of a forum selection clause. The case confirms the importance of retaining evidence of negotiations over a forum selection clause and/or the obtaining a franchisee's explicit agreement to a forum provision, as well as including a forum selection provision in guaranties.

Gordon & Rees's client, a national franchisor located in New Jersey, brought an action for unpaid royalties from a Louisiana franchisee based upon breach of a franchise agreement and personal guaranty. Defendants moved to dismiss the Complaint for lack of personal jurisdiction pursuant to Federal Rule 12(b)(2) and improper venue under 12(b)(3), and alternatively sought to transfer venue to a Louisiana federal court pursuant to 28 U.S.C. § 1404(a). 

Defendants argued that, despite a New Jersey forum selection clause in the parties' 2002 franchise agreement, the Court lacked jurisdiction over them because they were in an unequal bargaining position and the clause was essentially non-negotiable. Defendants also contended, among other things, that the clause expired along with the franchise agreement in 2007, that a 2008 term extension addendum to the agreement did not reference the forum selection clause, that the clause could not apply to the guarantors because the guaranty did not reference it, and that it was inconvenient and unfair to require them to litigate in New Jersey.

Senior New Jersey District Court Judge Dickinson R. Debevoise denied Defendants' motion in its entirety. The Court agreed with all of G&R's legal and factual arguments with respect to the forum selection clause in finding that jurisdiction and venue were proper in New Jersey. In reaching its decision, the Court noted that G&R had presented sufficient evidence that Defendants attempted to modify the clause and ultimately agreed to sign the 2002 agreement even after the franchisor would not agree to remove the choice of forum clause. Significantly, the Court also held that the guarantors are bound to the provisions of the franchise agreement's New Jersey forum selection clause because their guaranty obligated them to perform "all obligations" of the franchisee, even if the guaranty did not specifically reference the clause. Further, the Court agreed that the convenience/interests weighed in favor of litigating the case in New Jersey, where the franchisor was located, and not in Louisiana.

Ronald A. Giller