Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Ark.: Forum-selection clause mandated transfer of dry cleaning franchisee’s claims, (Oct 14, 2015)

By Michael Menzhuber, J.D., LL.M.

A dry cleaning and laundry franchisee’s claim that the franchisor violated the Arkansas Franchise Practices Act (AFPA) was transferred to the federal district court for the Northern District of Texas by the federal district court in Little Rock, Arkansas. The court transferred the claim after determining that venue should be according to the franchise agreement’s forum-selection clause (Ajax Holdings, LLC v. Comet Cleaners Franchise Group, LLC, October 9, 2015, Wright, S.).

Background. Ajax Holdings, LLC (Ajax) entered into twelve licensing agreements with Comet Cleaners Franchise Group, LLC (Comet) to operate a dry cleaning and laundry business under Comet’s name and trademark. Under the agreements: (1) Ajax had sole responsibility for all employment decisions; and (2) the operation and management of the stores were handled by pre-determined managers/operators who were responsible for paying fees and expenses, including Ajax’s portion of revenue from each store.

Shortly after taking over the stores, Ajax began to have issues such as: (1) one store had no lease in effect; (2) the profitability of the majority of stores was far below what Comet had represented; (3) the licensing agreements did not reflect how the stores were operated; (4) Comet did not monitor and provide training; (5) the store managers/operators were told by Comet not to pay royalty fees to Ajax; and (6) collusion between Comet and the manager of the most profitable store to turn over the franchise to the manager.

Ajax filed a claim in Arkansas state court that alleged that Comet violated the AFPA by its misrepresentations, fraudulent acts, and intentional omissions. Comet removed the case to federal court and moved to: (1) dismiss the complaint in state court for lack of jurisdiction, improper venue, and failure to state a claim; all based on the failure of Ajax to attach a copy of the written agreements on which its claim was based; and (2) transfer venue to the Northern District of Texas, pursuant to the agreements’ forum-selection clause. Ajax responded by filing a motion to remand, on the basis that Comet waived its right to transfer by filing a motion to dismiss in state court.

Motion to remand. In support of its motion to remand, Ajax argued that Comet, by filing a motion in the state court to dismiss, manifested its intention to proceed in that court. The district court, however, determined that a motion in state court to dismiss, that does not address the merits of the case, does not demonstrate a willingness on the movant’s part to litigate in that court. Because Comet’s motion to dismiss was based on Ajax’s violation of a procedural rule, a defect which could be fixed by filing an amended complaint with the missing agreements attached, the court determined that Comet did not waive its right to transfer.

Ajax also argued the case should be remanded because its claim was based entirely on state law. The court, however, determined that, since the case was removed from state court based on diversity of citizenship, there was no reason that the case should be remanded so that Arkansas could decide the matter.

Motion to transfer. Ajax asserted that the agreements’ forum-selection clause: (1) did not apply to its claims; and (2) violated Arkansas public policy. It also argued that 28 U.S.C. § 1404(a) convenience of the parties and various public-interest factors weighed against the transfer.

In granting the motion to transfer, the court determined that: (1) the forum-selection clause did apply to the claim because it was broad enough to encompass a claim, such the claim by Ajax, that was based on alleged misrepresentation and omissions prior to the execution of the agreement; (2) Ajax failed to establish that this was an unusual case were the forum-selection clause should not control; and (3) the 28 U.S.C. § 1404(a) factors were inapplicable.

The case is No. 4:15CV00494 SWW.

Attorneys: Katie A. Middleton (Gill Ragon Owen P.A.) for Ajax Holdings LLC. Orin Eddy Montgomery (Montgomery, Adams & Wyatt, PLC) for Comet Cleaners Franchise Group LLC

Companies: Ajax Holdings, LLC; Comet Cleaners Franchise Group, LLC.

Cases: FranchisingDistribution ArkansasNews