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The Franchise Memorandum

De Facto Franchisee’s Contacts With Franchisor Not Sufficient to Confer Personal Jurisdiction

The United States District Court for the District of Colorado dismissed a trademark infringement action for lack of personal jurisdiction, finding that discussions between a franchisor and an out-of-state potential franchisee were not sufficient to confer personal jurisdiction over the potential franchisee. Rocky Mountain Chocolate Factory v. Arellano, 2017 WL 4697503 (D. Colo. Oct. 19, 2017). The dispute began when the Coloradobased franchisor, Rocky Mountain Chocolate Factory (“RMCF”), and Timothy Arellano pursued negotiations to transfer an existing RMCF franchise in Nevada to Arellano. Negotiations eventually failed before the parties entered into an agreement, but Arellano continued operational control of the store, acting as a de facto franchisee. RMCF brought suit in Colorado for trademark infringement, alleging that although the infringement occurred exclusively in Nevada, it harmed RMCF in Colorado, where it is entitled to receive royalty and other payments from Arellano.

The court declined to exercise jurisdiction, holding that Arellano’s contacts with Colorado were so weak that subjecting him to jurisdiction in Colorado would be unreasonable and against due process. The court underwent a three-step analysis, first finding that RMCF “just barely” satisfied the minimum contacts standard needed to confer jurisdiction. Calling it a very close call, the court concluded that Arellano’s application to be a franchisee, his purposeful acts in negotiating to take over the existing franchise, and his operations as a de facto franchisee provided a sufficient showing of minimum contacts with Colorado. However, those contacts were outweighed by a majority of reasonableness factors, notably that it was not reasonably foreseeable that Arellano might have to defend claims in Colorado. The court found it “highly significant” that RMCF decided to initiate a business relationship with Arellano without a signed franchise agreement. In the court’s view, RMCF and its lawyers should have foreseen the possibility that without the executed franchise agreement, and the choice of law and venue protections it would have provided, a court might determine that Nevada would be a more appropriate venue. Furthermore, Nevada would be more convenient because its substantive law likely governed the tort claims, and RMCF sought an injunction that would only have effects in Nevada. In light of these factors, combined with Arellano’s weak contacts with Colorado, the court refused to exercise personal jurisdiction over him.

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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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