Franchisee 101: Leaky Forum Selection for Roofing Franchisor | Lewitt Hackman

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A federal district court in Indiana held that a forum selection clause in the franchise agreement prevailed over a competing forum selection clause in the personal guaranty.

Roofing franchisor, Honest Abe Roofing Franchise, Inc. (“Honest Abe”), signed a franchise agreement with franchisee, Lesjon Holdings, LLC, and a personal guaranty with its owners, the Keims. The franchise agreement provided Illinois as the venue for dispute resolution but the personal guaranty designated Indiana. The franchisee’s training occurred in Indiana, but the franchisee’s territory was in Illinois.

In 2022, Honest Abe terminated the franchise agreement based on breaches related to annual reports, data reporting and minimum local advertising obligations. Honest Abe then filed a lawsuit in Indiana. The franchisee removed the case to federal district court in Indiana and then filed a motion to dismiss for improper venue, or alternatively, to transfer the case to federal district court in Illinois.

The court found that both forum selection clauses appeared to be mandatory, but because they were contradictory, and only one could be enforced, one clause is primary and the other secondary. Honest Abe argued the forum selection clauses were for separate agreements and were unrelated. Franchisee argued that the contracts must be looked at together because they were part of the same transaction, executed simultaneously, and a breach of the personal guaranty required a breach of the franchise agreement. In addition, there was an integration clause and any inconsistencies or conflicts were to be construed against the drafter, franchisor. The court agreed with franchisee.

Because there was a valid forum selection clause, the court then looked at the public interest arguments against a transfer under federal law. The court held that the Central District Court of Illinois was less congested than the Indiana federal court and Illinois franchise law was at issue under the Illinois Franchise Disclosure Act. The court concluded that all of the alleged breaches occurred in Illinois and the contact with Indiana was not substantial and that Illinois was the proper venue.

Franchisees should consult with franchise counsel prior to signing any franchise agreement with a franchisor to evaluate forum selection clause(s) and possible ramifications should a dispute arise. Franchisees also need to be aware of applicable state franchise laws, if any, that might control despite conflicting language regarding choice of law and jurisdiction in the franchise agreement.

Honest Abe Roofing Franchise, Inc. v. Lesjon Holdings, LLC, 2023 U.S. Dist. LEXIS 216811 (S.D. Ind. Dec. 6, 2023)

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