Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Ohio: Non-signatories “closely related” to franchisee were bound by forum selection clauses, (Jul 22, 2015)

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

A home health care franchisor could proceed with federal and state claims against the franchisee’s husband and the company to which she assigned her two franchisee interests, despite their claims that the court lacked personal jurisdiction, the federal district court in Cincinnati has ruled. The husband and company alleged a lack of personal jurisdiction because (1) they did not have sufficient contacts with Ohio and (2) they were not parties to the franchise agreement, which provided for personal jurisdiction in Ohio. Their motion to dismiss was denied because, although neither of them were signatories to the franchise agreements, they did sign agreements consenting to personal jurisdiction in Ohio and were “closely related” to the franchisee (H.H. Franchising, Inc. v. Brooker-Gardner, July 21, 2015, Beckwith, S.).

Background. Carol Brooker-Gardner (Carol) entered into a franchise agreement with H.H. Franchising Systems, Inc. (HH) to purchase two senior citizen home health care and medication management franchises. Both franchise agreements contained forum selection clauses in which the franchisee consented to personal jurisdiction in Ohio for any disputes arising out of the agreements. Carol subsequently assigned her franchise interests to History Makers, Inc., an Oregon corporation founded by Carol and her husband, Michael Gardner, to market genealogical and archive services. In 2012, Carol and Michael established Ralph & Millie’s Place (R&M), a competing adult daycare service.

HH filed a complaint against Carol, Michael, History Makers, and R&M alleging a claim of federal trademark infringement as well as several state law claims. HH alleged that Carol breached the franchise agreements by: (1) falsely reporting that the franchise’s decline in revenue was due to her termination of a state agency contract to provide skilled medical care; and (2) establishing a competing an adult day care service which diverted business from the HH franchise.

The defendants moved to dismiss the claims against them for lack of personal jurisdiction because: (1) their contacts with the state of Ohio were insufficient to satisfy the Due Process Clause; and (2) they were not parties to the franchise agreements and, therefore, could not be bound by forum selection clauses.

“Closely related.” Although Michael was not a non-signatory to the franchise agreements, the court found that he was “closely related” to Carol. According to the court, Michael was intimately involved in the dealings of one of the franchises because he: (1) signed the franchise deposit remittance form; (2) signed the deposit check that went toward the purchase of the franchise; (3) attended the initial training to open the franchise and was an active participant in the training programs; (4) signed the “Addendum to Franchise Agreement,” indicating that he was an owner of the franchise; and (5) signed a confidentiality agreement acknowledging receipt of a letter from HH suspending certain payment obligations. Additionally, HH’s records indicated numerous occasions where he communicated with HH support personal.

Although History Makers was a non-signatory to the franchise agreements, the court determined that it also was “closely related” to Carol. The court noted that Carol assigned her interest in the franchises to History Makers and, therefore, determined that, by virtue of the assignment, History Makers was bound by the forum selection clauses. Moreover, History Makers was directly related to the franchise agreements and the current dispute because: (1) History Makers was involved in the dealings of one of the franchises; (2) the HIPPA Business Associate Agreement signed by Carol named History Makers as the covered entity and listed it as a franchisee; and (3) the certificates of liability insurance identified History Makers as the company that was insured.

HH argued that, even though R&M did not sign the franchise agreements, it was “closely related” to Carol because CBG is its owner and it could reasonably foresee being bound by the forum selection clauses. The court disagreed and concluded that, even though R&M was owned by Carol, it was not “closely related to her and was not subject to the forum selection clauses. Unlike Michael and History Makers, there was no evidence that R&M was involved in the operations of the franchise and there were no documents indicating that it had an ownership interest in either of the franchises.

The case is No. 1:14-CV-651.

Attorneys: William Michael Gustavson (Law office of William Michael Gustavson) for H.H. Franchising Systems, Inc. Jason Allen Mosbaugh (Weltman Weinberg & Reis) for Carol Frances Brooker-Gardener and Michael Edward Gardner.

Companies: H.H. Franchising Systems, Inc.

Cases: FranchisingDistribution OhioNews