FRANCHISEES: ARBITRATION FORUM SELECTION CLAUSES ARE PROBABLY ENFORCEABLE
As Franchise Agreements (FAs) usually contain terms requiring the Franchisee to resolve disputes with the Franchisor through arbitration in a foreign state or commonwealth, you need to be aware of the nuances of this law in New Jersey. This is a confusing issue even to knowledgeable business people, who may be familiar with the New Jersey Franchise Practices Act (NJFPA), but mistakenly rely upon its stated policy of invalidating forum selection clauses in FAs. Understand that this legislative mandate runs counter to the body of federal law concerning arbitration and forum selection. Bottom line: if your FA cites the Federal Arbitration Act, then your state law prohibiting arbitration forum selection is preempted and the Franchisor’s selection of another geographic region for conflict resolution will likely be enforced by our state courts.
FRANCHISE AGREEMENT FORUM SELECTION CLAUSES
Starting with the basics, does your FA contain arbitration provisions? If so, did the Franchisor specifically refer to the Federal Arbitration Act (FAA)?i If the FA does not cite the FAA, then look to see whether your state or commonwealth has a statute prohibiting Franchisors from enforcing forum selection clauses for arbitration. In New Jersey, this prohibition is found in the NJFPA.ii Specifically, by its terms the Act prohibits franchise agreements from “[specifying] the jurisdictions, venues or tribunals in which disputes arising with respect to the franchise, lease or agreement shall or shall not be submitted for resolution . . . .”iii (Do not be confused by the references in the Act to motor vehicle franchises. The NJFPA covers all franchise relationships in New Jersey, not just motor vehicle dealerships.)
The statute’s mandate against forum selection clauses was solidified by the New Jersey Supreme Court, which in 1996 ruled:
[F]orum-selection clauses in franchise agreements are presumptively invalid, and should not be enforced unless the franchisor can satisfy the burden of proving that such a clause was not imposed on the franchisee unfairly on the basis of its superior bargaining position. Evidence that the forum-selection clause was included as part of the standard franchise agreement, without more, is insufficient to overcome the presumption of invalidity.iv
FRANCHISE AGREEMENTS IN NEW JERSEY
At this point you may be asking: how is it possible for a straightforward statutory provision, backed by the New Jersey Supreme Court’s clear declaration of public policy, end up being a losing argument in a dispute between the Franchisee and Franchisor? It took some time for this issue to flesh out in New Jersey, and there may still be confusion, as well as a reluctance by some trial courts to bow to the federal law. First, the federal courts raised the issue of preemption,v followed by a New Jersey Superior Court, Chancery Division vi court, which recognized that the FAA, together with the U.S. Constitution’s Supremacy Clause, could not be undermined by the NJFPA. Then in 2006, the New Jersey Appellate Division weighed-in and noted that the Supreme Court in its 1996 decision did not address the issue of arbitration clauses in FAs, and therefore, the Court did not consider the issue of preemption under the FAA.vii This left the door open for further interpretation.
Although the Appellate Division recognized the FAA preemption, it was also mindful of the strong public policy in New Jersey which sought to protect a Franchisee from “an overbearing franchisor” intent on destroying the Franchisee’s business before the Franchisee could obtain injunctive relief. Moreover, the Court noted that there were instances where State law might still prevail over the FAA when there were one or more unconscionable terms in the FA. Note, it is the Franchisee’s burden of proof to establish the unconscionableness of the FA’s terms. Therefore, the Appellate Division held that there may be instances where the New Jersey Superior Court could accept jurisdiction and rule on applications seeking temporary injunctions, and then refer the matter out to arbitration, as specified in the FA. This process allows for protection of the Franchisee’s business (by establishing a status quo) while the dispute winds its way through arbitration.
Keep in mind that arbitration forum selection clauses should be carefully evaluated by the Franchisee before executing the FA, because these terms are likely to be enforced. In this worst case scenario, you, the Franchisee, may find yourself engaged in a long-distance arbitration at great cost and inconvenience to your business.
If you need a Franchise Attorney in New Jersey please contact Kilcommons Law at 908.713.1862 or info@kilcommonslaw.com
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[i] 9 U.S.C.S. §§ 1 to 16
[ii] N.J.S.A. 56:10-1 to 29
[iii] N.J.S.A. 56:10-7.3(a)(2)
[iv] Kubis & Perszyk Assocs. v. Sun Microsystems, Inc., 146 N.J. 176, 195, 680 A.2d 618 (1996)
[v] Cent. Jersey Freightliner, Inc. v. Freightliner Corp., 987 F. Supp. 289, 300 (D.N.J.1997)
[vi] B & S Ltd., Inc. v. Elephant & Castle Intern., Inc., 388 N.J. Super. 160; 906 A.2d 511 (Ch. Div. 2006)
[vii] Allen v. World Inspection Network Intern., Inc. 389 N.J. Super. 115; 911 A.2d 484 (App. Div. 2006)
BE ADVISED that these comments are not intended as legal opinions and are not to be relied upon as legal advice. If you need legal advice, please contact us to discuss the specifics of your franchise business.
© KilcommonsLaw, P.C. 2015