Franchise 101: The Forwarded Franchisee; and Outside Chance of a Franchise

Franchisor 101: The Forwarded Franchisee

A district court in Arizona granted a franchisor’s motion to transfer venue to Missouri pursuant to the terms of the franchise agreement.

S&G Elite LLC (“S&G”) and ST National Franchising, LLC (“Franchisor”) entered into a franchise agreement in March 2023 for the operation of a franchised “The Mail Center” location in Tucson, Arizona. The franchise agreement contained a forum selection clause, which provided that the venue and jurisdiction for any claims would be in the state and federal court nearest to Franchisor’s corporate headquarters, located in Kansas City, Missouri at the time of execution.

S&G filed claims against Franchisor for fraudulent inducement, breach of contract, and breach of the covenant of good faith and fair dealing in federal court in Arizona. Franchisor filed a motion to transfer venue, arguing the forum selection clause in the Franchise Agreement is mandatory and requires all disputes to be litigated in the state or federal courts nearest Franchisor’s corporate headquarters in Kansas City, Missouri.

While a civil action may be brought where any defendant resides, if all defendants are residents of the same state, or where a substantial part of the events or omissions giving rise to the claim occurred, a district court may transfer an action to any district where all the parties have consented. As such, forum selection clauses are given controlling weight in all but the most exceptional cases.

S&G argued that its case was exceptional, in that transferring its case to Missouri would not be more equitable or fair. It claimed the franchise agreement, including the forum selection clause, was fraudulently induced by Franchisor based on false promises regarding the franchise’s profitability and reputation.

The court determined that S&G failed to show that enforcement of the forum selection clause would be unjust or unreasonable and that the general allegations of misrepresentation of the franchise’s profitability and reputation were insufficient to invalidate the forum selection clause. Therefore, the court held the forum selection clause was valid and enforceable.

Forum selection clauses are common tools for franchisors to determine where an action may be brought. Franchisors should consult with counsel to ensure their franchise agreements contain enforceable forum selection clauses.

S&G Elite LLC v. ST National Franchising, LLC, No. CV-25-00037-TUC-RM (D. Ariz. Feb. 13, 2025)

Franchisee 101: Outside Chance of a Franchise

A New Jersey Court of Appeals found that a retailer was not a franchisee under New Jersey’s Franchise Practices Act (NJFPA) and therefore NJFPA’s termination requirements did not apply to the retailer’s termination.

Eastern Outdoor is a New Jersey retailer of custom outdoor kitchens. AMD is a manufacturer of outdoor grills. In 2010, Eastern Outdoor began selling grills manufactured by AMD. The grills were displayed in Eastern Outdoor’s showroom. The products were purchased on a wholesale distributorship basis.

In 2019, AMD terminated Eastern Outdoor’s distributorship in favor of a competitor. Eastern Outdoor filed a complaint against AMD alleging a violation of its franchise rights under the NJFPA along with claims of tortious interference with prospective business relations and common-law indemnification.

At trial, the court granted summary judgment in favor of AMD, dismissing Eastern Outdoor’s claims under the NJFPA, finding that there was no written agreement establishing a franchise between the parties. On appeal, the court disagreed with the earlier finding that a “comprehensive and integrated written agreement” is required. Instead, the NJFPA defines a franchise to consist of a written arrangement. Nonetheless, the court reached the same conclusion and granted summary judgment because Eastern Outdoor failed to provide sufficient evidence to establish a written arrangement.

The NJFPA protects franchisees against indiscriminate terminations by prohibiting cancellation or non-renewal of franchises for other than good cause. Good cause is the franchisee’s failure to substantially comply with requirements imposed upon it by the franchise.

Analyzing the NJFPA’s statutory language, the court determined that Eastern Outdoor had to prove: (1) there was a written arrangement between Eastern Outdoor and AMD; (2) within that arrangement, AMD granted a license to use its intellectual property; (3) the arrangement reflects a community of interest between the parties; (4) the parties contemplated or required Eastern Outdoor to maintain a place of business in New Jersey; (5) gross sales between the parties exceed $35,000 for 12 months preceding the institution of suit pursuant to the act; and (6) more than 20% of the franchisee’s gross sales are intended to be or are derived from such franchise.

The court determined that while Eastern Outdoor sold AMD’s products as a wholesale distributor, nothing demonstrated that it was granted a license, and a distribution agreement or relationship was insufficient to establish a franchise under the NJFPA. Additionally, it was undisputed that AMD never sought or exerted control over Eastern Outdoor’s marketing and sale of AMD’s products and never had access to or reviewed Eastern Outdoor’s financial records. The court held that summary judgment was appropriately granted dismissing Eastern Outdoor’s claims.

Not every business relationship qualifies as a franchise. States have different requirements for establishing a legitimate franchise relationship. Franchisees should consult counsel to determine whether their business arrangements and/or agreements are sufficient to establish a franchise relationship in their respective states.

N.A.R., Inc. v. Eastern Outdoor Furnishings, No. A-3990-22 (Super. Ct. App. Div. Jan. 24, 2025)