Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—M.D. N.C.: Texas franchisee was not subject to jurisdiction in North Carolina, (May 9, 2014)

By Peter Reap, J.D., LL.M.

Donald Bruce Henderson, Jr., a Texas vending machine business franchisee, was not subject to personal jurisdiction in North Carolina for purposes of a lawsuit filed against him there by his franchisor, Protocol, Inc., because the franchisee never purposefully availed himself of the benefits and protections of North Carolina law, the federal district court in Greensboro, North Carolina, has decided (Protocol, LLC v. Henderson, May 8, 2014, Osteen, W.). Therefore, an exercise of personal jurisdiction over Henderson would violate due process. The franchisee’s motion to dismiss the suit was granted.

Background. The franchisor is an international supplier of over-the-counter medications, personal products, and novelty items sold via wall-mounted vending dispensers. It offers franchises for the operation of multi-vending businesses that sell, place, service, and lease vending machines. The franchisor was formed in 1998, and in 2006, moved its offices from Minnesota to Greensboro, North Carolina, where it is currently located.

The parties entered into several agreements, both before and after the franchisor’s move to North Carolina. With each agreement at issue in this case, the franchisee signed the agreement in Texas before faxing it to the franchisor’s office in North Carolina. The franchisor then executed the agreements and returned them to the franchisee by fax. This process reflected the franchisor’s standard procedure for executing any contract with one of its distributors or franchisees. The franchisee has never signed an agreement in North Carolina, and none of the contracts between the parties included a North Carolina forum-selection clause or choice-of-law provision. To the contrary, the parties’ franchise agreement and a 2007 Operation Agreement contained a Minnesota forum-selection clause.

The franchisor filed suit against the franchisee, including breach of the parties’ franchise agreement, tortious interference, and fraud. Before the court was the franchisee’s motion to dismiss for lack of personal jurisdiction.

Analysis. The Fourth Circuit cited a number of nonexclusive factors that a court may consider in the business context when determining whether a defendant has purposefully availed himself of the benefits and protections of a particular jurisdiction: (1) whether the defendant maintains offices or agents in the forum state; (2) whether the defendant owns property in the forum state; (3) whether the defendant reached into the forum state to solicit or initiate business; (4) whether the defendant deliberately engaged in significant or long-term business activities in the forum state; (5) whether the parties contractually agreed that the law of the forum state would govern disputes; (6) whether the defendant made in-person contact with the resident of the forum in the forum state regarding the business relationship; (7) the nature, quality and extent of the parties’ communications about the business being transacted; and (8) whether the performance of contractual duties was to occur within the forum.

The court made the following findings with respect to each of the eight nonexclusive factors, which, on balance, weighed against the exercise of specific personal jurisdiction over the franchisee in this case, the court determined.

First, the franchisee lives in Texas and maintained routes in Texas, Louisiana, Mississippi, Florida, Georgia, and Alabama. He has never serviced vending machines in North Carolina, nor has he ever maintained offices or agents in North Carolina, the court observed. Second, although he is receiving payments from a North Carolina company, the franchisee does not own any property in North Carolina. Third, the franchisee did not reach into North Carolina to solicit or initiate any of the agreements at issue in this case; instead, the franchisee did agree to continue and expand a long-term business relationship with the franchisor after the franchisor relocated to North Carolina, but the franchisor proposed each expansion and there was little, if any, negotiation as to each expansion.

Fourth, in general, the franchisee’s business activities occurred outside of North Carolina. Fifth, the parties have never agreed that North Carolina law would govern any dispute arising from their relationship or that North Carolina is the required forum for any dispute. In fact, the parties’ franchise agreement and, by incorporation, the 2007 Operation Agreement and its Addenda, requires that any dispute arising between the parties be litigated in Minnesota. Sixth, the only in-person contact between the franchisee and the franchisor’s representatives in North Carolina were the occasional conferences Plaintiff hosted for the individuals it worked with. Seventh, the parties’ communications about the business relationship were limited to communications between Defendant and Lang, which included some number of emails and a handful of phone calls each year.

Finally, apart from submitting quarterly revenue reports to North Carolina via the franchisor’s online forms, mailing checks for fees and commissions to the franchisor’s Greensboro office, and sending purchase orders to the franchisor, the franchisee’s performance of contractual duties occurred outside of North Carolina.

In sum, the franchisee’s contacts with North Carolina in this case failed to reach the “purposeful availment” threshold, the court ruled. Rather, these contacts, even when viewed collectively, were more aptly categorized as random, fortuitous, and attenuated, such that an exercise of jurisdiction would offend traditional notions of fair play and substantial justice, according to the court.

The case is No. 1:12CV460.

Attorneys: Eric H. Biesecker (Nexsen Pruet, PLLC) and James M. Susag (Larkin Hoffman Daly & Lindgren Ltd.) for Protocol, LLC. Lucas J. Thompson (Twin Cities Law Firm, LLC) for Donald Bruce Henderson, Jr.

Companies: Protocol, LLC

Cases: FranchisingDistribution NorthCarolinaNews