The Franchise Memorandum

In Fazoli’s Franchising Systems, LLC v. JBB Investments, LLC, 2008 WL 4525433 (E.D.Ky. Sept. 30, 2008), the United States District Court for the Eastern District of Kentucky addressed issues arising from the choice of law and venue provisions contained in the terms of several Fazoli’s franchise agreements. Fazoli’s claimed that the defendants, who were guarantors of the franchise agreements, were subject to personal jurisdiction in Kentucky by virtue of having signed their personal guaranty agreements in Kentucky.

In finding that no personal jurisdiction over the guarantors existed, the court found that minimum contacts with a forum state cannot be established solely on the basis of a contract between a resident and a nonresident of the state. The court held that execution of a guaranty with a Kentucky-based company did not mean that the signatories purposefully availed themselves of the privilege of transacting business in Kentucky. The court also found that the acts or omissions alleged to have occurred did not have a substantial enough connection with Kentucky to make the court’s exercise of jurisdiction reasonable, as all acts involved in the case occurred in Arkansas or in other states except the signing of the personal guaranty agreements with a Kentucky company. Thus, the court found that there were inadequate minimum contacts between the defendants and Kentucky to provide personal jurisdiction over them. 

Next, the court analyzed whether the requirement of personal jurisdiction was waived. The court stated that a party to a contract may waive its right to challenge personal jurisdiction by consenting to personal jurisdiction in a forum selection clause. Here, the court found that only the underlying franchise agreements contained an explicit waiver of any objection to the personal jurisdiction of the Kentucky courts and that the defendants were not a party to the franchise agreements. The court found that the guarantors did not waive the right to personal jurisdiction.