Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Fla.: DirectBuy franchisees bound by franchise agreements’ forum selection clause, (Aug 24, 2015)

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

A putative class action brought by DirectBuy, Inc. franchisees, which alleged violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and the Florida Deceptive and Unfair Trade Practices Act (FDUTPA), was transferred to a federal district court in Indiana. In granting the defendant’s motion to transfer, the federal district court in Miami determined that: (1) the plaintiff franchisees were bound by the forum selection clause in the franchise agreements and (2) the private and public factors weighed in favor of transferring the individual plaintiff’s action to Indiana (Elite Advantage, LLC v. Trivest Fund, IV, L.P., August 21, 2015, Altonaga, C.).

Background. Elite Advantage, LLC, a Florida limited liability company, was an assignee of a franchisee agreement with DirectBuy, a members-only buying club franchisor. Edward E. Sell resided in Indiana and operated a DirectBuy franchise in Illinois. Trivest Partners IV, Inc. purchased DirectBuy in November 2007.

At the time DirectBuy was purchased by Trivest, the contributions that franchisees were required to make to DirectBuy franchisees were limited to three percent of the gross amounts that the franchisees charged for new memberships.

Elite and Sell brought a claim against Trivest, in the Southern District of Florida, alleging violations of § 1962(c) of RICO and the FDUTPA. According to Elite and Sell, Trivest engaged in a scheme to fraudulently induce them into funding DirectBuy marketing and advertising programs by imposing unauthorized charges far in excess of three percent.

Trivest requested a transfer of the case to the Northern District of Indiana (Northern District) on the basis that a forum selection clause in the franchise agreements designated that all claims be brought in that district and that the traditional 28 U.S.C. § 1404(a) transfer-of-venue analysis favored transfer.

Effect of forum selection clause. Although Trivest acknowledged that they were not parties to the franchise agreements containing the forum selection clause, they maintained that they were sufficiently closely related to the franchise agreement to enforce the forum selection clause. Trivest also maintained that the doctrine of equitable estoppel permitted them to enforce the forum selection clause.

The court determined that the relationship between Trivest and DirectBuy was precisely the type that made it foreseeable that Trivest would be able to avail themselves of the forum selection clause. The court dismissed the plaintiffs’ argument that Trivest was not closely related to the franchise agreements because the plaintiffs’ counsel, in a related case conducted in Indiana, asserted that the claims against Trivest and the claims alleged against DirectBuy were inextricably intertwined.

The court also determined that the doctrine of equitable estoppel supported Trivest’s efforts to benefit from the franchise agreements forum selection clause. Equitable estoppel precludes a party from claiming the benefits of some of the provisions of a contract while simultaneously attempting to avoid the burdens of other provisions and that the plaintiffs were trying to precisely do just that. Despite the plaintiffs’ decision not to attempt to hold Trivest liable for any breach of duty under the franchise agreements, the plaintiffs’ RICO and FDUTPA claims were interwined with the contractual obligations contained in the franchise agreements.

The court, however, determined that the forum selection clause only applied to Elite and not to plaintiff Sell. It noted that Trivest and the plaintiffs agreed that Sell was not bound by his franchise agreement’s forum-selection clause because he operated his franchise in Illinois and Illinois law prohibited enforcement of forum selection clauses in franchise agreements. The court also determined that Sells’ decision to align himself with Elite, who was bound by the forum selection clause was immaterial in determining whether he was subject to the clause.

Private, public interest factors. The parties agreed that the action could have been brought in Northern District of Indiana. Because this preliminary inquiry was satisfied, the court turned to an analysis of the private interest and public interest factors.

The court determined that the private interest factors weighed in favor of transfer. In making this determination, the court found that: (1) Sell’s forum choice was not entitled to deference because the action was a nationwide class action and he resided outside the forum; (2) the availability of witnesses and parties in Indiana, along with the commitment that the Trivest witnesses would travel to the Northern District if necessary, strongly favored transfer; (3) the location of relevant documents and relative ease of access to sources of proof was not significant; (4) Sell resided in the Northern District, the plaintiffs’ counsel were located much closer to the Northern District than to Florida, and Sell did not demonstrate why the Northern District was an inconvenient forum; (5) the locus of the operative facts, Trivest’s alleged fraudulent communications and misrepresentations, occurred in the Indiana District; and (6) the relevant means of the party was a neutral factor.

The court also determined that the public interest factors weighed in favor of transfer. The consideration of familiarity with governing law did not weigh against transfer to the Northern District because: (1) the Northern District was equally familiar with the FDUPTA claim as Florida, since it was modeled after its federal counterpart, the Federal Trade Commission Act; (2) there was uncertainty whether this putative class action would involve FDUPTA any more than the trade practice laws of other states; and (3) there were efficiencies in having the case assigned to a court that was already familiar with the factual and legal claims against DirectBuy.

The court also found that Indiana had as much interest in the case as Florida because the case focused on the actions of an Indiana-based company and plaintiff Sell resided in Indiana. Therefore, the court found that no unfair burden would be placed upon Indiana citizens serving on a jury passing upon the legality of the challenged conduct.

Finally, the court found that a transfer to the Northern District was not against the public interest because: (1) the Northern District has approximately 200 fewer weighted filings per judge than the Florida court; and (2) a transfer would conserve the Florida court’s judicial resources without burdening the Indiana court..

The case is No. 15-22146-CV-Altonaga

Attorneys: Barbara A. Bagdon (Dady & Gardner, PA), and Jessica L. Farley (Pia, Anderson, Dorius, Reynard & Moss) for Elite Advantage, LLC. James A. Goniea (Wiggin and Dana, LLP), and Mary Leslie Smith (Foley & Lardner LLP) for Trivest Fund IV, LP, Trivest Partners GP, LLC, and Trivest Partners IV, Inc.

Companies: Elite Advantage, LLC; Trivest Fund IV, LP; Trivest Partners GP, LLC; Trivest Partners IV, Inc.

Cases: FranchisingDistribution FloridaNews