By Jordan M. Halle
Franchise agreements, like most significant commercial agreements, often contain forum selection clauses that attempt to set the venue for litigation in a pre-negotiated jurisdiction. The enforceability of forum selection clauses is a frequent subject of litigation, particularly where the underlying agreement is between parties of unequal bargaining power. In ServiceMaster of Fairfax, Inc. v. ServiceMaster Residential/Commercial Services, L.P., 2017 WL 3023342 (D. Md. July 17, 2017), the United States District Court for the District of Maryland opined on an important issue: whether a mandatory forum selection clause becomes permissive in light of a state-law addendum to a franchise agreement permitting a venue different from that set forth in the franchise agreement.
The current leading case on the enforceability of a forum selection clause is the U.S. Supreme Court’s decision in Atlantic Marine Construction Co. v. U.S. District Court for the Western District of Texas. The Court opined in that case that when an agreement contains a valid forum selection clause that is bargained for by the parties, if a plaintiff who brings a suit in a forum other than the one agreed upon bears the burden of establishing that any motion to transfer to the agreed upon forum should be denied.
However, the forum selection clause at issue in Atlantic Marine was “mandatory,” i.e., it clearly required that litigation be brought only in the specified forum. Conversely, a “permissive” forum selection clause is one that merely permits jurisdiction in the selected forum without precluding it elsewhere. The Court did not address whether its analysis in Atlantic Marine applied equally to a “permissive” forum selection clause.
The District of Maryland resolved this issue in the negative in ServiceMaster of Fairfax, Inc. v. ServiceMaster Residential/Commercial Services, L.P. In that case, plaintiff ServiceMaster of Fairfax, Inc. (Franchisee) had entered into four franchise agreements with defendant ServiceMaster Residential/Commercial Services, L.P. (Franchisor). Each agreement contained a forum selection clause setting Memphis, Tennessee as the venue for all litigation. One of the franchise agreements, for a franchised location in Maryland, contained an addendum which provided that the Maryland Franchise Registration and Disclosure law allows a franchisee to bring a lawsuit in Maryland. Franchisee brought suit in Maryland state court, the Franchisor removed the case to the District of Maryland, and then moved to transfer the matter to the U.S. District Court for the Western District of Tennessee.
The court in ServiceMaster observed that although the Fourth Circuit had yet to address whether Atlantic Marine applied to permissive forum selection clauses, the majority of post-Atlantic Marine cases have decided against extending Atlantic Marine’s application to permissive forum selection clauses, and that it would do the same.
The ServiceMaster court, therefore, had to determine whether the forum selection clauses at issue were mandatory or permissive. Facially, said the court, the forum selection clauses were mandatory, because each stated that “all litigation . . . must and will be venued exclusively in Memphis, Tennessee.” The court continued, however, that the franchise agreement contained other provisions that needed to be addressed in determining whether the forum selection clause was mandatory or permissive. First, the forum selection clause was qualified by a lead-in providing that “unless the law applied in Paragraph 25.1 of this Agreement provides otherwise.” Second, Paragraph 25.1 provided that the laws of Tennessee apply unless the state in which the franchisee was doing business requires that the law of that state applies. Third, and finally, the Maryland addendum to the franchise agreement stated that a franchisee may bring a lawsuit in Maryland for claims arising under the Maryland Franchise Law.
Nonetheless, the ServiceMaster court concluded that the forum selection clauses were mandatory, because the addendum provided only a permissive exception for a subcategory of claims arising under Maryland law, which does not alter the mandatory nature of the forum selection clause. The court observed that the language merely “allows” a franchisee to maintain a suit in Maryland, but does not require it to do so, and the forum selection clause otherwise precluded maintenance of an action in any other jurisdiction.
In deciding the motion to transfer, the District of Maryland relied solely on public interest considerations. Such factors included administrative difficulties of court congestion, local interest in having localized controversies decided at home, and the interest in having the trial of a diversity case in a forum that is at home with the law. The court did not find in favor of Franchisee with regard to any of these factors, and, therefore, ordered the transfer of the case to the U.S. District Court for the Western District of Tennessee.
For Franchisors, this case provides solace that forum selection clauses in valid franchise agreements will be enforced by their terms, despite an addendum to the contrary, so long as the addendum presents the sole exception to the forum selection clause for a specified class of claims.
Jordan M. Halle is an attorney at Whiteford, Taylor & Preston LLP, and extends her thanks to the Franchise and Distribution Law Committee for their help with this article.