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The Franchise Memorandum

Court Finds New Jersey Franchise Practices Act Applies to Development Agreement and Declines to Enforce Forum Clause

The United States District Court for the District of New Jersey recently denied a franchisor’s motion to dismiss based on an area development agreement’s forum selection clause, on the ground that the contract had created a “franchise” and controlling state law did not enforce such clauses against New Jersey franchisees. The parties in Navraj Restaurant Group, LLC v. Panchero’s Franchise Corp., 2013 U.S. Dist. LEXIS 115199 (D.N.J. Aug. 14, 2013), had entered into an area development agreement under which the developer had the right to recruit and solicit franchisees in New Jersey. The contract contained a forum selection clause that required any claims arising out of the agreement or the parties’ relationship to be brought in Cook County, Illinois. Nonetheless, Navraj brought suit against Panchero’s in federal court in New Jersey, alleging that Panchero’s had made false and misleading statements meant to induce Navraj to sign the agreement, and thereafter breached the contract.

Panchero’s moved to dismiss the complaint based on the forum selection clause. While the New Jersey Franchise Practices Act presumes that a forum selection clause in a contractual relationship between a franchisor and franchisee is invalid, Panchero’s argued that the development agreement had not created a “franchise.” The court disagreed, noting that the agreement obligated Navraj to pay a “franchisee fee,” explicitly granted it the right to use Panchero’s trademarks, and required it to open a franchise of its own in New Jersey. Thus, the agreement met each of the Act’s statutory requirements for creating a “franchise.” Finally, the court held that Panchero’s could not overcome the forum selection clause’s presumption of invalidity under New Jersey law because it had not shown that the clause was “not imposed because of its superior bargaining power.”

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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