Jul 18, 2020 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

Connecticut Federal Court Rules for Franchisee and Strikes Unfair Floating Forum Selection Clause

The United States District Court for the District of Connecticut has ruled that a franchisee of Doctors Express who purchased the exclusive rights to develop and manage Doctors Express Urgent Care franchises in two counties in New York and Connecticut was permitted to sue the franchisor in a court in Connecticut despite a forum selection clause in the agreement requiring that the litigation be filed in Alabama since the forum selection clause could not be presumed enforceable, because it was not reasonably communicated to the franchisee that he agreed to file suit in the jurisdiction where a future assignee of Doctors Express was based and because enforcement by that assignee, AFC Franchising, LLC, was not sufficiently foreseeable to him; accordingly, it would be “unfair, unjust, and unreasonable” to hold the franchisee to a clause that did not provide sufficient notice as to the forum being selected.

DANILO PURUGGANAN, PLAINTIFF V. AFC FRANCHISING, LLC, DEFENDANT, Bus. Franchise Guide (CCH) P 16657 (C.C.H.), 2020 WL 3274207 (May 13, 2020)

 

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Excerpt of Court’s Decision:

 

Because the Defendant’s motion turns on the interpretation and enforceability of the MDA’s forum selection clause, as indicated above, the Court’s assessment of the four inquiries set forth by the Second Circuit supplants the traditional inquiry undertaken in a forum non conveniens analysis. Federal common law governs the fourth inquiry, and the Second Circuit has assumed without deciding that federal common law likewise applies to the first inquiry. Starkey v. G Adventures, Inc., 796 F.3d 193, 196 n.1 (2d Cir. 2015). “In answering the interpretive questions posed by parts two and three of the four-part framework, however, [the Court] normally appl[ies] the body of law selected in an otherwise valid choice-of-law clause.” Martinez, 740 F.3d at 217–18. In this case, the MDA contains a choice-of-law clause specifying Maryland as the substantive law to be applied. (MDA ¶ 19.6.) However, as the Defendant points out, Maryland has adopted the federal standard in determining the enforceability of a forum selection clause, see, e.g., Davis Media Grp., Inc. v. Best W. Int’l, Inc., 302 F. Supp. 2d 464, 466 (D. Md. 2004), and the parties do not identify any differences in the substantive law of Maryland that preclude this Court from applying relevant federal precedent to the interpretive issues posed here, see Martinez, 740 F.3d at 223. The Court will accordingly “apply general contract law principles and federal precedent to discern the meaning and scope of the forum clause.” Id. (quotation marks and citation omitted).

Here, the Court answers the inquiry at both steps one and three in the negative and therefore the clause does not enjoy the presumption of enforceability.1 With respect to the first inquiry, “[a] forum selection clause is reasonably communicated where it is phrased in clear and unambiguous language,” and where it is included “within the main text of a contractual agreement.” Compuweigh Corp. v. Honeywell Int’l, Inc., No. 3:16-CV-01108 (VAB), 2016 WL 7197360, at *3 (D. Conn. Dec. 9, 2016) (quotation marks and citations omitted); see also Midamines SPRL Ltd. v. KBC Bank NV, No. 12-CV-8089 (RJS), 2014 WL 1116875, at *3 (S.D.N.Y. Mar. 18, 2014), aff’d, 601 Fed. Appx. 43 (2d Cir. 2015) (“A clause is reasonably communicated to a party where the party signs an agreement that explicitly directs the party to the clause”). Here, the MDA apprised Purugganan that suits arising out of or in connection with the MDA must be brought in the “state or judicial district in which we have our principal place of business at the time the action is commenced ….” (MDA ¶ 19.7 (emphases added).) The MDA defines “we,” “us,” or “our” as referring only to Doctors Express, without including any successors in interest, assignees or other persons or entities that might obtain a subsequent interest in the MDA. (MDA at 1.) Thus, the four corners of the MDA unambiguously establish that the parties agreed to litigate in the forum in which Doctors Express’s principal place of business was located at the time the lawsuit was filed.

Indeed, there are no provisions in the MDA that notified the Plaintiff that if the agreement were assigned to another party, the Plaintiff also agreed that suit must be brought in the forum in which the assignee’s principal place of business was located. “Although notice can be sufficient without explicitly naming the jurisdiction in which contracting parties agree to litigate, a forum selection clause must nonetheless allow the parties to predict with a reasonable degree of certainty where they may be haled into court.” Gordian Grp., LLC v. Syringa Expl., Inc., 168 F. Supp. 3d 575, 582 (S.D.N.Y. 2016). While “[f]ederal courts thus generally enforce forum selection clauses tied to a party’s principal place of business despite the risk that the party might relocate,” they “have not, however, extended this principle to enforce forum selection clauses containing even more uncertainty[.]” Id.

AFC relies upon a series of cases in which courts upheld the validity of a so-called “floating forum selection clause” as a general matter. These cases are inapposite because in each involving an assignee, the forum selection clause expressly contemplated that the clause would apply equally with respect to the principal place of business of the assignee of a contracting party. See e.g., Preferred Capital, Inc. v. Assocs. in Urology, 453 F.3d 718, 723 (6th Cir. 2006) (enforcing forum selection clause where “[t]he contract clearly stated that assignment was a possibility, and that in the event of assignment, any disputes would be governed by the laws of the state of incorporation of the assignee” and further provided that suit would be venued exclusively where the contracting party’s or its assignee’s principal place of business was located) ; IFC Credit Corp. v. Aliano Bros. Gen. Contractors, 437 F.3d 606 (7th Cir. 2006) (upholding validity of identical forum selection clause); IFC Credit Corp. v. Burton Indus., Inc., No. 04 C 5906, 2005 WL 1243404 (N.D. Ill. May 12, 2005) (same);2 Danka Funding, L.L.C. v. Page, Scrantom, Sprouse, Tucker & Ford, P.C., 21 F. Supp. 2d 465, 472 (D.N.J. 1998) (concluding that “where a forum-selection clause professing consent to jurisdiction in the state where a party’s or its assignee’s principal place of business lies is part of an agreement in a sophisticated business transaction, and one party to the agreement is a law firm, the forum-selection clause is valid absent fraud, serious inconvenience, or a violation of public policy, notwithstanding that the law firm was unaware of the assignee’s principal place of business at the time of signing the agreement”).

Accordingly, interpreting the MDA’s forum selection clause as providing adequate notice to the Plaintiff that he might have to litigate in the forum of the principal place of business of some future, unknown assignee of Doctors Express is simply a bridge too far from what the case law will sustain. The interpretation of the clause posited by the Defendant simply would not allow the Plaintiff “to predict with a reasonable degree of certainty where [he] may be haled into court.” Gordian Grp., 168 F. Supp. 3d at 582.

Even if the Court were to determine that the forum selection clause was reasonably communicated to the Plaintiff, moreover, the Court declines to find that AFC, as an assignee, is subject to the clause at step three of the analysis. The Court acknowledges that the mere “fact a party is a non-signatory to an agreement” is not a basis “to preclude enforcement of a forum selection clause.” Aguas Lenders Recovery Grp. v. Suez, S.A., 585 F.3d 696, 701 (2d Cir. 2009). Rather, “where the alleged conduct of the non[signatories] is closely related to the contractual relationship, a range of transaction participants, parties and nonparties, should benefit from and be subject to forum selection clauses.” Magi XXI, Inc. v. Stato della Citta del Vaticano, 714 F.3d 714, 722 (2d Cir. 2013) (quotation marks and citation omitted). Accordingly, “[i]f successorship is established, a non-signatory is subject to the … presumption of the enforceability of mandatory forum selection clauses.” Aguas, 585 F.3d at 701. However, under the so-called “closely related test,” “the relationship between the non-signatory and th[e] … signatory must be sufficiently close that the non-signatory’s enforcement of the forum selection clause is ‘foreseeable’ to the signatory against whom the non-signatory wishes to enforce the forum selection clause.” Magi XXI, 714 F.3d at 723.

Under the terms of the MDA and the circumstances presented here, AFC’s enforcement of the forum selection clause was not, in any way, foreseeable to Purugganan.3 While the MDA contemplates that Doctors Express can assign this Agreement … to a third party without restriction” (MDA ¶ 15.1) and provides that it is binding upon the parties’ “permitted assigns, and successors-in-interest” (MDA ¶ 19.9), as discussed above, the forum selection clause neglects to extend the phrase “our principal place of business” to an assignee of Doctors Express and in fact specifically confines the forum selection clause to the principal place of business of Doctors Express. This case is therefore not akin to those instances where federal courts have held that an assignee of a contracting party was sufficiently “closely related” to the signatory to enforce a forum selection clause identifying a specific, unfluctuating forum. Cf. e.g., Cfirstclass Corp. v. Silverjet PLC, 560 F. Supp. 2d 324, 329 (S.D.N.Y. 2008) (holding that defendant could invoke forum selection clause in agreement signed by its predecessor-in-interest requiring that disputes be litigated in the courts of England and Wales).

In sum, because it was not reasonably communicated to the Plaintiff that he agreed to suit in the jurisdiction in which an unknown and unidentified future assignee of Doctors Express has its principal place of business, and because enforcement of the forum selection clause by AFC was not sufficiently foreseeable to Purugganan to satisfy the closely related test, the forum selection clause is not entitled to a presumption of enforceability. In addition, because it is “‘unfair, unjust, or unreasonable to hold’ parties to clauses that do not provide sufficient notice as to the forum being selected,” Gordian Grp., 168 F. Supp.3d at 582 (quoting M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 18 (1972)), the Court would, for the same reasons, decline to enforce the forum selection clause at step four of the analysis.

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