Securing Field Advantage: Michigan Federal Court Reaffirms Applicability Of Forum Selection Clauses In Franchise And Channel Partner Agreements | Foley & Lardner LLP
Forum selection clauses are important in franchise disputes, especially in disputes brought to federal court. Just ask Williams Insurance & Consulting, Inc., a franchisee who was recently kicked out of his chosen forum in a lawsuit he brought against his franchisor, alleging unlawful termination of the franchise agreement. Williams’ misfortune provides an important lesson for franchisors and manufacturers: Federal courts are not necessarily bound by decisions by state legislatures to overrule forum selection clauses in franchise or distribution agreements. fact alone makes the referral to federal court merits serious consideration. Unfortunately for Williams, his franchisor got it and turned his decision to withdraw the lawsuit from Michigan state court into a successful motion to dismiss in federal court, sending Williams’ lawsuit back to square one.
Problem / Case summary
Williams sued its franchisor, Goosehead Insurance Agency, LLC, for, among other things, the wrongful termination of the parties’ franchise agreement. Williams Insurance & Consulting, Inc. v. Goosehead Insurance Agency, LLC, 533 F. Supp. 3d 555, 556 (ED Mich. 2020). Williams initially filed a lawsuit in Oakland County Circuit Court, but Goosehead referred the case to the Eastern District of Michigan. In the aftermath of the withdrawal, Goosehead decided to fire, emphasizing and relying entirely on a forum selection clause in the franchise agreement. The clause required that “any action” brought against Goosehead be brought in the original “state and judicial district” of Goosehead, Texas. Williams countered by asserting that “Michigan statutory law makes[ed] the choice of court clause is null and unenforceable. Specifically, Williams pointed out the Michigan Franchise Investment Law prohibition on forum selection clauses in franchise agreements, which nullifies any “provision requiring that arbitration or litigation be conducted outside [of Michigan]. “
Goosehead’s strategic withdrawal decision turned out to be a very good one, as the court recognized that “[i]In a diversity lawsuit, the enforceability of the forum selection clause is governed by federal law, ”not state law. Consequently, the “party opposed to the choice of court clause [i.e., Williams] carries ”the burden of proof, and“ a choice of court clause must be maintained in the absence of solid proof that it must be set aside ”. The court applied the Sixth Circuit three-part test to assess the applicability of a forum selection clause and concluded that Williams did not bear this heavy burden. On this basis, the court dismissed Williams’ lawsuit without prejudice.
Key points to remember:
The lessons of this case are simple but important:
1. Even in the face of hostile state laws, manufacturers and franchisors can still use forum selection clauses to exert some control over the potential litigation forum. There is no guarantee that the clause will be enforced, but a clear majority of circuits – seventh and tenth notwithstanding – apply federal law to questions regarding the enforceability of forum selection clauses. And the common understanding under federal law is that these provisions are prima facie valid and must be applied unless they are unreasonable in the circumstances.
2. Lawyers should be aware that in most federal courts, forum selection clauses are presumed to be enforceable. Deciding not to withdraw an action brought against your franchisor or manufacturer customer in unfavorable state court could cost your customer the opportunity to enforce a forum selection clause.
3. That being said, forum selection clauses are not unassailable under federal law. But defense attorneys angry with a state court and faced with a legal ban on forum selection clauses should still question whether a federal court forum provides a more welcoming place to assert the applicability of a selection. forum.