Without doubt, the driest legal issue to discuss is jurisdiction. Yet, the location of the court in which the dispute will be resolved can have a tremendous impact on the Franchisee, who usually must shoulder the burden of litigating the dispute in the home state of the Franchisor. [1] Therefore, understanding this complicated issue is important to both Franchisees and Franchisors.
Typically, the Franchise Agreement will contain language identifying a jurisdiction, meaning the state/commonwealth, where a court (either state or federal) will decide the dispute through litigation. The contract language, however, is just the starting point for a court to decide the proper venue (place). The factors employed to decide jurisdiction are complex. The purpose of this article is to boil these factors down to the bare essence. (Still, I know my SEO guy is going to tell me that this article is way too long!)
A helpful case to study for the purpose of breaking down the jurisdiction analysis is a recent decision by the U.S. Court of Appeals for the First District, Massachusetts. The case is captioned, Baskin-Robbins Franchising LLC v. Alpenrose Dairy, Inc.[2]
The Baskin-Robbins and Alpenrose Dairy’s franchise relationship began in 1965, and over the course of forty-nine years there were multiple renewals of the original agreement. At the time of the first agreement, Baskin-Robbins’ predecessor corporation (Baskin-Robbins, Inc.) was located in California. Alpenrose is located in Oregon. In about 2001, Baskin-Robbins moved its headquarters to Massachusetts.
A dispute arose between the parties in 2014, and Baskin-Robbins immediately filed an action in the federal court, Massachusetts, seeking relief. Alpenrose then challenged the jurisdiction in Massachusetts, arguing that the Commonwealth lacked personal jurisdiction over it, Alpenrose, and therefore, venue was improper. In the alternative, Alpenrose argued that the matter should be transferred to a federal court in Washington State (where it argued it could assert the Washington Franchise Investment Protection Act).
Alpenrose won the first round when the federal district court agreed that there was no personal jurisdiction and dismissed Baskin-Robbin’s lawsuit.
The Court of Appeals, however, reversed this decision and ruled that, upon review of all the salient factors, Massachusetts was the appropriate venue to litigate the dispute. Here is the court’s analysis:
First, the due process clause of the Fourteen Amendment to the U.S. Constitution requires that a defendant (here, Alpenrose) have “certain minimum contacts with [the forum state]” such that the lawsuit does “not offend the traditional notions of fair play and substantial justice.” International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). This is the starting point for all jurisdiction reviews. From this point the court addressed several factors.
The court determined that Baskin-Robbin was claiming specific jurisdiction in the matter (as opposed to general jurisdiction, which is a distinction with a difference, but I am not going there). Having settled the specific jurisdiction issue, the court then addressed the following: (1) whether Baskin-Robbin’s claims related directly to Alpenrose’s activities in Massachusetts; (2) whether these contacts amounted to a purposeful “availment” of the “privilege of conducting activities in Massachusetts” (meaning, did it invoke the Commonwealth’s laws and, significantly, were Alpenrose’s activities in Massachusetts voluntary and foreseeable); and finally, (3) whether the court’s exercise of jurisdiction was reasonable.
Concerning the first of these factors, the court found that Alpenrose’s activities were related to Massachusetts because it had sent correspondence to the Commonwealth concerning the renewal issue, which created a “sufficient nexus” between these parties. (This factor is very flexible, and it does not take much to establish a nexus.) Second, the court found that Alpenrose had purposely, foreseeably and voluntarily availed itself of the Commonwealth’s jurisdiction, thus subjecting it to judgment by Massachusetts for its activities. Baskin-Robbins conducted numerous activities in Massachusetts on behalf of the Franchisee. Specifically, quality assurance of Franchisee’s product, which product samples were regularly shipped to Franchisor’s headquarters for analysis. Further, the Franchisor’s customer service department in Massachusetts handled customer inquiries and complaints. Finally, the Franchisor provided operational functions on Alpenrose’s behalf. Given these factors, the court was inclined to rule in Baskin-Robbin’s favor. However, there was one last step.
The final step in the analysis concerns five additional factors: (1) Alpenrose’s burden in appearing across the country; (2) Massachusetts’s interest in resolving this dispute; (3) Baskin-Robbin’s interest in convenient and effective relief; (4) the court’s interest in resolving the dispute effectively and conveniently; and (5) the common interest of the Commonwealth in promoting “substantive social policies.” The Court of Appeals, however, did not waste much ink in addressing these factors given the strength of Baskin-Robbin’s argument on the initial factors, above. The court simply concluded that these factors, “[t]aken in their entirety…[were] in rough equipoise.”
Therefore, the litigation continued in Massachusetts, and Alpenrose was saddled with the additional cost of cross-country travel and having to retain local counsel to assist in the case.
A best practice tip for Franchisees: Assuming you have the negotiating leverage to make such a demand, request that the jurisdiction clause in your Franchise Agreement identify your state/commonwealth as the venue for disputes. However, be mindful that your state law may hold such venue clauses unenforceable; therefore, agreeing to the Franchisor’s jurisdiction clause may not harm you in the long run.
A best practice tip for Franchisors: In addition to including the jurisdiction clause that identifies your home as venue, be certain to document the history of contacts of the Franchisee with your state/venue. By way of example: do you require Franchisees to attend annual meetings in your jurisdiction (and do they attend)?; do you provide the types of support services like that provided by Baskin-Robbin?; do you require that royalty checks be sent to your jurisdiction, and do you mail to the Franchisee remittances/products, etc., from your jurisdiction? Such facts are helpful to establish that your chosen jurisdiction is appropriate under the Franchise Agreement, and well as the U.S. Constitution.
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. 2016
[1] Please note that a majority of Franchise Agreements will contain an arbitration clause, which dictates where the dispute will be arbitrated, as opposed to litigated. Litigation is the focus of this article. For more on arbitration disputes, see https://www.kilcommonslaw.com/franchise/franchise-facts-arbitration-clauses/.
[2] 2016 U.S. App. LEXIS 10203