Restrictions on Forum-Selection Clauses in Franchise Agreements and the Federal Arbitration Act: Is State Law Preempted?

Article excerpt

I. INTRODUCTION The use of forum-selection clauses in contracts continues to increase. Emboldened by the Supreme Court's endorsement of forumselection clauses,1 large companies now frequently use these clauses in a variety of contracts. Contracting parties use these clauses in part to ensure that the parties can resolve any dispute in a convenient forum. Often, however, a party inserts a forum-selection clause to limit liability by increasing the barriers to litigation or arbitration.2 Typically, the party inserting the forum-selection clause has superior bargaining power and inserts into the contract a clause designating a forum remote to the other party, where any dispute over the contract will be heard. In this scenario, the other party to the contract, if seeking redress for a breach of the contract, must travel to a distant and unfamiliar jurisdiction to have the claim heard, often before the opposing party's "home court." When the party seeking redress is unsophisticated and has no wealth of resources, the costs associated with bringing a suit can be prohibitive.3 Thus, the party inserting the forum-selection clause is less likely to be sued or held liable for a breach. In recent years, businesses have begun using a special kind of forum-selection clause: an arbitration clause which provides that any dispute will be resolved in binding arbitration.4 Sometimes parties use these clauses to ensure that an expert will decide the dispute or to avoid the cost and inconvenience of litigation. Again, however, parties often use arbitration clauses to force a weaker party to seek redress in a remote, unfamiliar forum.

Forum-selection clauses and arbitration clauses are common in franchise contracts.5 In the typical franchise contract, the franchisor is a large, national corporation, represented by sophisticated legal counsel. The franchisee is an individual, often unsophisticated, and almost always unrepresented by legal counsel at the time of contracting. The contract is presented to the franchisee on a take-itor-leave-it basis. If the franchisee objects to the terms the franchisor can usually find another willing franchisee. The contract is several pages long, with the arbitration/forum-selection clause hidden beneath boilerplate legalese.6 These circumstances provide a great incentive for franchisors to use the forum-selection clause as a weapon to limit the franchisee's legal recourse. The franchisees, often unsophisticated and not represented by legal counsel, are likely not to read the clause or to understand fully its implications. Even if the franchisee does recognize the clause's significance, little or no opportunity to change it will exist.7

In response to this type of overreaching by franchisors, several states have adopted laws that require arbitration or litigation over a franchise contract to occur in the franchisee's home state and which void contractual provisions that provide otherwise.8 These laws are often enacted as part of a state's franchise laws, which generally are designed to protect franchisees from unfair contracts and unfair treatment by franchisors who have superior bargaining power.9 The statutes restricting forum-selection clauses are specifically aimed at protecting the franchisee from having to pursue redress of a breach of contract in a remote forum.10 Many states have recently passed these laws (or have promulgated them in state courts), and commentators predict that this trend will continue.ll

Arguably, however, these state laws cannot invalidate arbitration agreements because of the preemptive power of the Federal Arbitration Act ("FAA").12 The Supreme Court has interpreted the FAA as establishing a national policy in favor of arbitration.la Any state law which undermines this policy, or which singles out arbitration agreements for suspect treatment, is in danger of FAA preemption. The FAA does not preempt state laws that apply general contract law to invalidate arbitration agreements. …