New Jersey Court Refuses to Apply Case Invalidating Forum Selection Clauses to Arbitration

By Barry Heller and J. Dwyer

Will your forum selection clause in your arbitration clause be enforced in the face of a state franchise policy against enforcing forum selection clauses? It should, at least according to a recent decision from the United States District Court for the District of New Jersey.

The court there determined that Kubis & Perszyk Assocs. v. Sun Microsystems, 680 A.2d 618 (N.J. 1996), the New Jersey Supreme Court decision holding that forum selection clauses in franchise agreements are presumptively invalid, does not apply to arbitral forum selection clauses in franchise agreements.

In Cohen v. Stratis Business Centers, Inc., a New Jersey-based franchisee brought suit against its Texas-based franchisor in the U.S. District Court in New Jersey. The parties’ franchise agreement contained an arbitration clause with a forum selection clause providing for arbitration by the American Arbitration Association office nearest the franchisor’s home office (i.e., Dallas, Texas). The franchisor moved to dismiss, or in the alternative, to compel arbitration.

The matter was assigned to a magistrate, who issued a report and recommendation granting the motion to compel arbitration but denying the motion to enforce the forum selection clause. The franchisor objected to the portion of the report denying enforcement of the forum selection clause. The franchisor contended that the magistrate’s ruling was in error because the Federal Arbitration Act ("FAA") preempts Kubis to the extent it invalidates forum selection clauses in arbitration clauses.

The court reviewed the magistrate’s recommendation de novo and disagreed with the conclusion that the arbitral forum selection clause was not enforceable. The court held that the holding in Kubis that forum selection clauses in franchise agreements are presumptively invalid relates only to judicial forums, as opposed to arbitrations.

In reaching that conclusion, the court noted that Kubis involved a judicial forum selection clause, not an arbitral forum selection clause. The court further held that to the extent Kubis could be said to invalidate arbitral forum selection clauses in franchise agreements, it is preempted by the FAA. Therefore, the arbitral forum selection clause in the franchise agreement was valid.

Having found the arbitral forum selection clause valid, the court went on to consider a motion by the franchisor pursuant to the federal procedural statute to transfer venue to Texas. The court should have appropriately declined to consider the motion and left it to the arbitrator to determine the procedural issue of the location of the arbitration. See, e.g., Richard C. Young & Co., Ltd. v. Leventhal, 389 F.3d 1 (1st Cir. 2004); Terrell Independent School Dist. v. Benesight, Inc., 2001 WL 1636418 (N.D. Tex. 2001).

Nevertheless, perhaps because of the procedural posture of the case, the court considered the motion and declined to transfer the arbitration to Texas, concluding that the arbitration should be held in New Jersey because it was so closely tied to the state. The court based its conclusion on the fact that the matter arose in New Jersey and that the franchisee, its witnesses and its books and records were all located in New Jersey. The court also found it significant that the franchisor was a large international company with substantially larger revenues than the franchisee, and that its witnesses were located in Florida, not Texas.

In light of this decision, notwithstanding decisions like Kubis, franchisors with arbitral forum selection clauses in their franchise agreements should be able to enforce those clauses in disputes with franchisees based in that state. However, franchisors should be careful that if they ask the court to transfer pursuant to the federal transfer statute, the court may apply the relevant factors and decide that the arbitration should nevertheless remain in a state other than the one chosen in the arbitration clause.

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