You be the Judge: Federal law trumps state franchise law

YOU BE THE JUDGE

If you are contemplating the purchase of an interest in a franchise, this may interest you.

Those persons who purchase such interests in a franchised business are known as franchisees. Franchisees are sometimes at a disadvantage when disputes develop with their franchisors. New Jersey recognized this and enacted the New Jersey Franchise Practice Act (NJFPA) years ago to protect franchisees from abuse.

The NJFPA specifically provided that franchisees can institute suit against franchisors in the Superior Court in New Jersey if the franchisor does not deliver on its obligations to the franchisee. In addition, the statute provides for the recovery of money damages or injunctive relief for a violation of the NJFPA.

Often franchise agreements require disputes with the franchisor be exclusively adjudicated out-of-state, in foreign jurisdictions convenient to the franchisor.

In a recent decision, the Chancery Division of the Superior Court was asked to apply the NJFPA to a dispute between the franchisee and the franchisor. The written franchise agreement provided that if the New Jersey franchisee had any dispute with the franchisor, it had to be arbitrated in the State of Minnesota, and in accordance with procedures set out in another statute--the Federal Arbitration Act.

The franchisee claimed the dispute arose in New Jersey; therefore this clause was inconvenient and should not be enforced.

YOU BE THE JUDGE: Why should a franchisee--whose harm was suffered in New Jersey where the franchise property is located and used--have to go to Minnesota to present his dispute for resolution?

The Chancery Judge held that these clauses, called forum-selection clauses, are presumptively invalid because they conflict with the purpose of the NJFPA to protect New Jersey franchisees..

However, the clause in this contract contained a different wrinkle--the arbitration clause invoked the Federal Arbitration Act. Because federal law--and not New Jersey law--was invoked, the judge held the forum-selection clause was not presumptively invalid.

The judge held that a franchisee could still attack the forum-selection clause under basic contract principles. However, in the case under consideration, the franchisee had not shown any reason to avoid arbitration in Minnesota.

The decision points out that a courtroom can bring justice and may be the only way to protect your rights. Our Firm knows courtrooms; we have harnessed the power of the law in courtrooms to bring justice for our clients for decades in Bergen County, Passaic County, Essex County, Morris County, Union County, Hudson County, Mercer County and throughout the State of New Jersey, as well as New York City. Please contact us to discuss how we can help you in a new lawsuit or provide a "second opinion" about your pending lawsuit. There is no obligation for the initial consultation.