Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.N.J.: Forum selection clause was unenforceable under New Jersey franchise law, but arbitration clause could be invoked, (Aug 16, 2013)

By Tobias J. Gillett, J.D., LL.M.

In an action brought by a former restaurant operator and franchise recruiter against the franchisor, a forum selection clause was unenforceable because the arrangement constituted a franchise for purposes of the New Jersey Franchise Practices Act (NJFPA), and the franchisor was unable to show that the NJFPA’s presumption against the enforceability of forum selection clauses did not apply, the federal district court in Trenton, New Jersey has ruled (Navraj Restaurant Group LLC v. Panchero’s Franchise Corp., August 15, 2013, Sheridan, P.). However, the court found an arbitration clause in the franchisor’s agreement with another franchisee was enforceable, and the court granted the parties to the first agreement fourteen days within which to decide whether to invoke the arbitration clause in that agreement.

In March 2007, Navraj Restaurant Group, LLC entered into an agreement with Panchero’s Franchise Corp. under which Navraj would serve as Panchero’s agent for the purpose of recruiting franchises in the New Jersey area. In October 2010, AMP Food Holdings entered into a franchise agreement with Panchero’s.

Navraj alleged that Panchero’s failed to provide support guaranteed in the contract, and made false representations to get Navraj to sign the agreement. Navraj also alleged that Panchero’s breached the agreement by refusing to approve potential franchise agreements in areas with a heavy African American or Hispanic presence, improperly increasing fees and approval criteria, and failing to make payments as required under the contract. In turn, AMP also alleged that Panchero’s induced AMP to enter its agreement through false and misleading statements, including through a false and misleading franchise disclosure document. In addition, Amp alleged that Panchero’s breached its agreement by failing to approve or disapprove its proposed franchise location within thirty days, making continuing the project financially unfeasible, and by improperly terminating the agreement with Navraj, allegedly leading to a loss of all help and support from Panchero’s.

Navraj and AMP filed suit against Panchero’s, asserting claims for violations of the New Jersey Franchise Practices Act (NJFPA), the New Jersey Consumer Fraud Act, and the Iowa Business Opportunity Promotions Law, as well as numerous common law claims. Panchero’s filed a motion to dismiss.

Forum selection clause. The court concluded that the arrangement between Navraj and Panchero’s constituted a franchise for purposes of the NJFPA, and therefore a forum selection clause in the agreement specifying an Illinois forum was invalid. The court explained that “[a]ny forum selection clause in a contractual relationship between a franchisor and a franchisee under the NJFPA is presumed invalid.” The NJFPA specifies three factors that must be met for an arrangement to be considered a franchise under the statute: “(1) there is a ‘community of interest’ between the franchisor and the franchisee in the marketing of goods or services; (2) the franchisor granted a ‘license’ to the franchisee; and (3) the parties contemplated that the franchisee would maintain a place of business in New Jersey.”

In the present case, these factors were met, according to the court. The arrangement satisfied the “community of interest” factor, which requires that the distributor’s investments were “substantially franchise specific” and were required to be made by the parties’ agreement or the nature of the business, because the agreement referred to the “initial franchise fee” in its payment clause, and because numerous other provisions in the agreement concerned the marketing of goods at wholesale or retail.

The arrangement met the “license” factor, which required the franchisor to have given its “approval for the franchise to use its trademark or other identifying characteristics,” because the agreement “explicitly grant[ed] the plaintiffs a right to use a trade name, trademark, service mark, or related characteristics.” Finally, the arrangement satisfied the “place of business” factor because the agreement specified that Navraj would “at all times during this Agreement’s term own and operate at least one (1) franchised Panchero’s restaurant within the Territory.”

Because the forum selection clause was presumed invalid, and Panchero’s did not show “that the clause was not imposed because of its superior bargaining position,” the court declined to enforce it.

Arbitration clause. The parties did not dispute whether AMP’s relationship with Panchero’s constituted a franchise. Instead, Panchero’s sought to invoke an arbitration clause in the agreement with AMP. The court noted that the Federal Arbitration Act preempted the NJFPA as to arbitration clauses, rendering them enforceable.

The court enforced the arbitration clause, rejecting AMP’s argument that the agreement “constitutes a contract of adhesion and must be invalidated upon grounds of procedural unconscionability.” Although the agreement provided that “[n]othing herein contained shall bar Franchisor’s right to obtain injunctive relief against threatened conduct that will cause it loss of damages,” the provision did not give unreasonably favorable dispute resolution terms to Panchero’s because it did not alter the arbitration clause, which gave either party the right to demand arbitration. The clause also did not prohibit AMP from obtaining injunctive relief in the same manner, and a later clause stated that “Franchisor and Franchisee each have the right in a proper case to seek temporary restraining orders and temporary or preliminary injunctive relief.”

Moreover, despite the plaintiffs’ contention that Panchero’s agreements were “non-negotiable,” Navraj’s contract contained handwritten changes inserted by Navraj. Even if the court accepted that the agreement was a contract of adhesion, the plaintiffs did not show “that they had such unequal bargaining power that the contract must be voided,” the court found. The court noted that the plaintiffs “could have taken their business elsewhere or sought advice before entering into the contract,” and the plaintiffs did not show that Panchero’s had imposed any time limit on their ability to sign the contract.

Since the court found that the arbitration clause in the AMP agreement was valid and enforceable, the court issued an order compelling AMP to comply with the clause. Although the court found the forum selection clause was unenforceable, and therefore declined to dismiss Navraj’s claims on that basis, the court chose to grant the parties fourteen days within which to decide whether to invoke the arbitration clause in the agreement with Navraj. Therefore, the court declined to rule on the merits of Navraj’s claims in its present decision.

The case is Civil Action NO. 11-cv-7490 (PGS).

Attorneys: Mitchell J. Kassoff for Navraj Restaurant Group, LLC. Kenneth L. Leiby, Jr. for Panchero's Franchise Corp.

Companies: Navraj Restaurant Group, LLC; AMP Food Holdings; Panchero’s Franchise Corp.

Cases: FranchisingDistribution NewJerseyNews