United States: Location, Location, Location: Franchise Litigation in the Venue of your Choosing

Last Updated: June 28 2016
Article by Alexander S. Radus

A Massachusetts franchisor can sue an Oregon franchisee in Massachusetts, according to a recent decision from the United States Court of Appeals for the First Circuit. The case contains important lessons for franchisors seeking to keep lawsuits on their home turf.

When parties to a lawsuit hail from different states – or, as here, different coasts –the first issue adjudicated is often not the merits of the case, but rather, where the case will be adjudicated. This issue can be especially important for franchisors, who often engage in complex business relationships with franchisees across the country. If one or more of those relationships sours, how can a franchisor ensure that litigation occurs in a convenient forum?

While there are no certainties, Baskin-Robbins Franchising LLC v. Alpenrose Dairy, Inc. ("Alpenrose Dairy") provides a glimpse into the analysis a court might conduct when determining jurisdiction in the franchise context. No. 15-2190 (1st Cir. June 6, 2016).

The Background

Alpenrose Dairy involves a dispute over renewing a franchise agreement. From 1965 until 2014, Alpenrose Dairy, Inc. ("Alpenrose") was a franchisee of Baskin-Robbins Franchising, LLC ("B-R") and the parties renewed their franchise agreement multiple times. Alpenrose could renew at its option with at least 1 year's notice. When the parties negotiated the original franchise agreement, B-R was headquartered in California and the negotiations occurred in Oregon. In 1998, B-R moved its operations to Massachusetts.

After B-R's move, Alpenrose exercised its renewal option two times, in 2001 and 2007 (for a term ending on December 8, 2014). On December 2, 2013, Alpenrose notified B-R that it would not renew the franchise agreement. But in July 2014, Alpenrose wrote again, stating that it wished to "revoke" its decision and renew the franchise agreement again. Later, Alpenrose warned that if the franchise agreement was not renewed, it would be entitled to compensation under a Washington state law. B-R refused on the grounds that Alpenrose should have exercised its option prior to December 8, 2013; it also rejected Alpenrose's claim that compensation was due in connection of the non-renewal.

With an impasse on the horizon, B-R filed suit in federal court in Massachusetts, seeking a declaration that the franchise agreement expired on December 8, 2014 and that it owed no compensation to Alpenrose. Alpenrose moved to dismiss or to transfer the case, arguing that the Massachusetts federal court did not have personal jurisdiction over the Oregon-based franchisee.

The Analysis

Courts must have jurisdiction to hear cases, and one form of jurisdiction is a court's "personal jurisdiction" over defendants. When a person is sued, that person must have "minimum contacts" with the state in which the lawsuit is filed. Alpenrose argued that because it was based in Oregon, it did not have sufficient contacts with Massachusetts, and therefore the Massachusetts federal court did not have jurisdiction over Alpenrose.

The court disagreed. It analyzed three relevant factors and found that it had jurisdiction over Alpenrose.

Factor 1: Does the claim directly arise out of, or relate to, the defendant's forum state activities?

Factor 1 was satisfied because the claim arose directly out of the 2013 and 2014 letters that Alpenrose sent to B-R's Massachusetts offices. The letters related directly to B-R's claims that Alpenrose's renewal notice was not timely and that Alpenrose was not entitled to compensation in connection with the agreement's expiration.

Factor 2: Do the defendant's in-state contacts represent a purposeful availment of the privilege of conducting activities in the forum state, thereby invoking the benefits and protections of that state's laws and making the defendant's involuntary presence before the state's courts foreseeable?

Factor 2 is a mouthful, but essentially asks whether a defendant's connections with a forum state are voluntary and whether litigation in that state is foreseeable. Accordingly, under Factor 2, the court analyzed whether (i) Alpenrose's contacts with Massachusetts resulted from Alpenrose's own actions and whether (ii) it was foreseeable that Alpenrose could be sued in a Massachusetts court. The court specifically noted the services that B-R provided to its franchisees, e.g., a product quality assurance process, customer service department, and assistance on a wide variety of operational issues. The court recognized (as would most zees and zors) that these activities were "vital to the continuation of the franchisor-franchisee relationship." Therefore, the court found that Alpenrose deliberately targeted the Massachusetts economy and reasonably should have foreseen that a controversy could be adjudicated in a Massachusetts court.

Factor 3: Is the exercise of jurisdiction reasonable?

Under Factor 3, the court found that the exercise of jurisdiction was reasonable. The analysis need not be addressed in detail; however the court did note that both parties had significant means and, therefore, cross-country travel was not an obstacle. A court could decide the matter differently in the context of a less successful or start-up franchisee.

Mature franchise concepts often have franchisees across the country, and emerging franchisees aspire to. This model risks franchisors becoming involved in litigation in multiple jurisdictions far from home base. As Alpenrose Dairy demonstrates, franchisors can take certain steps to increase their odds of litigating on their own turf.

  1. Make sure your franchise and other agreements include forum selection clauses that require all controversies to be litigated (or arbitrated) in the state of your choosing.
  2. In consultation with counsel, when litigation looks imminent, consider filing a claim first in your preferred court. The Alpenrose Dairy court specifically noted that B-R had "raced" to the federal court in Massachusetts and sued Alpenrose when the impasse became clear
  3. Require correspondence between you and your franchisees to be in writing and addressed to your offices in your preferred forum state. While this may not be sufficient in itself, it can help build a case for personal jurisdiction. The Alpenrose Dairy court noted in particular that B-R's move to Massachusetts was "unilateral activity" and that Alpenrose's letters to Massachusetts, by themselves, were insufficient to satisfy Factor 2.  However, the letters helped establish Factor 1, because the lawsuit arose directly out of those written communications.
  4. If possible, provide the bulk of your services as a franchisor from your preferred home state. This may help demonstrate that franchisees voluntarily take advantage of your state's economy and expect that a lawsuit could be filed against them there.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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