Barber Power Law Group
Representing Franchisors, Franchisees + Entrepreneurs

Should a Franchisee sue in State or Federal Court?

If negotiations have fallen through, the first step in suing a franchisor is figuring out where to to file your lawsuit.

 

Should a Franchisee sue in State or Federal Court?

If negotiations have fallen through, the first step in suing a franchisor is figuring out where to to file your lawsuit.  You can either file in state court (i.e. the Superior Court in Mecklenburg County, North Carolina) or in federal court (i.e. the District Court for the Western District of North Carolina).  There are several considerations franchisees should think about in choosing between state and federal court.  Below are some key factors.

Judges

Judges are as diverse as any other profession.  Some are conservative and some are liberal.  Some are quiet and some are vocal.  Some are familiar with franchise issues and some certainly are not.  The primary laws governing franchises are the Federal Trade Commission rules and the federal intellectual property laws contained in the Lanham Act.  Federal rules = federal court.  Nevertheless, many franchisees still choose to sue in state courts because of more favorable non-franchise laws.  For instance, if a franchisor has wrongly treated a franchisee, that franchisee may sue for breach of the franchise agreement and unfair and deceptive trade practices.  A state claim for unfair and deceptive trade practices can be attractive, given the usual tripling of damages and recovery of attorneys' fees.

Enforceability of Judgments

Federal court judgments are easier to enforce in other states than state court judgments.  They are more "portable."  If a franchisee sues a franchisor in state court in the franchisee's state and wins, there's a chance their hard-earned judgment could be modified or even unenforceable in the state where the franchisor or its owners is located.  However, if a franchisee wins in federal court in their home state, the federal court in the franchisor's home state is much more likely to respect the judgment of its fellow federal court.  There's more unity in the federal system than among the different states in this regard.

Forum Selection Clauses

There's a chance you've already signed away your right to sue in federal or state court.  Most franchise agreements contain a "forum selection clause" that states where any lawsuits must be brought.  These are enforceable 99% of the time.  If you haven't signed your franchise agreement yet, make sure you have an attorney review it.  They will explain to you what rights you might be waiving and how any potential disputes would pan out.

Removal

Let's say things have gotten nasty between you and your franchisor.  You've finally decided to sue them in state court, and your attorney alleges intellectual property claims under the Lanham Act.  That's a federal issue, and the franchisor will have the option to remove the case to federal court if they choose to do so.  That sounds unfair, but Lanham Act IP issues are "permissive" in state court.  That means they can be brought at either the state or federal level, and they can be removed to the federal courts under some circumstances.  This brings me to chess.

At the end of the day, litigation is like a game of chess.  You want a franchise litigation attorney who can look five, ten, or twenty moves ahead.  Choosing where you sue your franchisor is the first move in your complex game of chess.  It will determine everything else in the course of the lawsuit - applicable law, evidence, procedure, and outcome.  

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