Enforcing Contract Terms Designed to Manage Franchisor Risk

January 1, 2000 Published Work

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During the 1990s, many prominent franchisors have become enmeshed in contentious litigation of systemwide disputes with franchisees. One leading quick-serve restaurant franchisor, for example, has faced a series of individual lawsuits over similar encroachment claims.1 Another has turned back repeated attacks - some in individual suits, some in class actions - on the enforceability of its arbitration clause.2 Others have litigated franchisee class actions on the merits, a daunting exercise that can expose the franchisor to a potentially crippling damage award.3

Franchisors that have not yet confronted such systemwide disputes should not assume that this is a function of either their superior business concepts or enlightened approaches to franchisee relations. No franchisor is immune, and without a well-conceived risk management strategy in place before a litigation outbreak, the continued viability of the system can be in jeopardy.

To have any chance of success, that strategy must be anchored in the terms of the franchise agreement. All prudent franchisors try to use standard contract terms to achieve some measure of predictability and control in the resolution of disputes with franchisees. This article is an overview of the current state of the law on enforcing risk management provisions in franchise agreements.

Choice of law clauses, judicial forum selection clauses, and arbitration clauses are the most common franchise agreement provisions designed to manage the franchisor's litigation risks. As those risks have exploded, however, franchisors have become ever more creative (or, from the franchisees' perspective, increasingly overreaching) in developing contract terms that not only select the forum for dispute resolution and choose the governing law, but also compel franchisees to mediate before asserting any claims, and purport to limit the relief available to franchisees.

Clauses requiring mediation before the franchisee sues or arbitrates are now standard. In franchising today, any attempt to foster an environment of negotiation and compromise instead of confrontation is a sound business practice. Also, if a franchisee rushes to file a claim instead of mediating, many courts would probably enforce a compulsory mediation provision without hesitation, given the widespread judicial fondness for alternative dispute resolution. But there is no mediation analog to the Federal Arbitration Act (FAA), and general contract principles and public policy arguments may not prevail in every jurisdiction.

As a practical matter, moreover, in some cases compelling an unwilling party to participate in nonbinding mediation may simply postpone the inevitable conflict and generate additional expense in the bargain. On the other hand, if the contract imposes time limits on resort to mediation and makes clear that compliance with those requirements is a condition precedent to the right to sue or arbitrate, strict enforcement of a compulsory mediation clause could extinguish the franchisee's claims.

As for judicial forum selection clauses and arbitration clauses, recent decision demonstrate once again that, no matter how much certain franchisors may dislike arbitration and wish instead to direct litigation to a particular forum, courts treat these contract provisions very differently. Because of the FAA and all of the recent U.S. Supreme Court precedent construing that statute so expansively, enforcement of an arbitration agreement is virtually automatic, at least in business disputes in federal courts, absent highly unusual facts or tactical blunders by the franchisor and its counsel.4 The fate of a judicial forum selection clause, however, is frequently uncertain.

An increasing number of franchisors are employing jury trial waivers and various forms of damage caps in their agreements. As with a judicial forum selection clause, however, no franchisor doing business nationwide can ever count on uniform application of these provisions. They are clearly never enforceable in certain jurisdictions, and almost everywhere else the specific facts of the case, assessed under an array of statutory and common law tests, will determine whether the clauses stand up.

Some franchisors may nonetheless conclude that, even if a jury trial waiver or damage limit could be successfully challenged, the provisions still make business sense because they dampen the expectation of franchisees and thereby deter claims. If franchisees believe - or so this argument goes - that they have waived their right to a jury and can recover only modest damages, and do not consult lawyers who understand that these restrictions are sometimes voidable, they may decide that tangling with the franchisor is not worth the bother. It is, of course, impossible to measure with any certainty whether that potential benefit outweighs the risk that judges, juries, and arbitrators will read an apparently one-sided franchise agreement as proof that the franchisor is overbearing and unfair, refuse to enforce the contract provisions, and then extend that view to all the facts in the case.

In balancing those competing concerns, it is crucial that franchisors and their counsel understand the relevant law in jurisdictions where disputes will likely arise. Similarly, franchisees and their lawyers must make informed judgment about the enforceability of risk management contract clauses, so that they are neither tilting at windmills nor overlooking opportunities to wage battles that they can win.

Compulsory Mediation Clauses

Authority on compulsory mediation clauses is sparse, but the available precedent shows that these provisions can occasionally determine the outcome on the merits. For example, in two federal cases involving automotive dealerships, Ford won summary judgment because the dealer had ignored mandatory mediation procedures and the contractual deadlines for mediation had passed. Whether other courts, especially state courts, would take the same approach in different franchise systems, with less sophisticated franchisees, is far from clear, particularly in jurisdictions with statutes that week to guarantee franchisees their day in court.

In Devalk Lincoln Mercury v. Ford Motor Co.,5 Ford's standard contract required dealers to submit, by a specified deadline, any "protest, controversy or claim" to mediation by the dealer policy board and provided that the"[a]ppeal to the Policy Board shall be a condition precedent to the Dealer's right to pursue any other remedy available under this agreement or otherwise available under law."6 After Devalk sued, Ford moved for summary judgment on various grounds, including breach of the compulsory mediation clause. The district court granted summary judgment and the Seventh Circuit affirmed.

The dealer contended that it had satisfied the underlying purpose of the clause by giving Ford notice of its claims and an opportunity to settle, and also that Ford had waived mediation by continuing to negotiate even though the dealer had missed the filing deadline with the board. The Seventh Circuit rejected this "substantial compliance" argument because the contract clearly stated that mediation was a condition precedent to litigation: "The clause takes itself outside the sphere of influence of the substantial performance rule."7 The waiver claim failed too, because Ford had never expressly waived the mediation clause, and the contract included another provision prohibiting implied waivers of the parties' rights.8

An Ohio district court reached a similar result, based on the same contract clause, in Bill Call Ford, Inc. v. Ford Motor Co.9 Judge Bell granted Ford summary judgment because the mandatory mediation clause was unambiguous and enforceable under basic rules of contract interpretation, and the dealer acknowledged its failure to comply.10

Other courts have stayed litigation in favor of mediation, relying on section 3 of the FAA.11 In Cecala v. Moore,12 the buyer of real property sued the seller, claiming a statutory violation. The sales contract included a clause requiring nonbinding mediation of "any and all disputes or claims ... arising out of or relating to" the contract, and the seller moved to stay the action pending mediation. The court granted the motion, after a careful analysis of whether the contract satisfied the interstate commerce requirements of the FAA. Apparently, the Cecala court and the parties simply assumed that nonbinding mediation was a form of arbitration subject to the FAA. It is far from clear whether that is correct and there is likely to be further litigation on this issue.13

Finally, if a party sues without mediating first, the deadline for mediation has not passed, and the court stays the lawsuit and compels mediation, a further question may arise: Is mere participating in the mediation enough, or is there some enforceable obligation to mediate in good faith? In a labor dispute, the D.C. Circuit has held that a court may relieve one side of its duty to mediate only if the duration of the mediation was unreasonable or the mediation was being conducted in an arbitrary fashion, "notwithstanding the lack of genuine hope or expectation that the parties will arrive at an agreement.14

Judicial Forum Selection Clauses and Arbitration Clauses

Two earlier articles cowritten by the author have explored the impediments to enforcing a judicial forum selection clause, the almost sacrosanct status of arbitration agreements, and the most effective strategy for enforcing arbitration clauses under FAA sections 3 and 4.15 This article will therefore not address these subjects in detail and will instead discuss three recent appellate decisions in the "Subway series," which illustrate again that enforcement of an arbitration clause is the closest thing to a sure bet that most franchisors and their counsel will ever see.16

The following are applicable with respect to judicial forum selection clauses:

  • The statutes, rules, or regulations of more than a dozen states bar contract clauses requiring a franchisee to litigate in another jurisdiction;17
  • As the New Jersey Supreme Court's decision in Kubis18 demonstrates, "even in jurisdictions where there has been no relevant legislative or regulatory activity, a franchisor can never know whether its judicial forum selection clause will stand up, because of the real risk that activist judges, with particular view of 'public policy' will reject the clause;19 and
  • "Even under federal law ... a franchisor invoking a judicial forum selection clause confronts not a uniform standard, but a case-by-case analysis of subjective issues that can vary widely from franchisee to franchisee"20

In short, "uniform enforcement of a judicial forum selection clause is now impossible for franchisors doing business nationwide."21

If the franchisee has a meaningful chance to get the franchisor before a hometown jury, especially in a state court that may not be overly hospitable to foreign corporations, or to have the case decided under a more "pro-franchisee" set of laws, it would be foolish not to try. The franchisee's chances of prevailing on dispositive motions and winning at trial may improve substantially, the transactional costs (e.g., travel and lodging expenses, local counsel fees) may be much less, and the prospect of litigating in what the franchisor perceives, rightly or wrongly, as a hostile forum may also enhance the odds of settlement on terms favorable to the franchisee.

In stark contrast, trying to escape an arbitration clause is almost never worth the effort: the possibility of success is vanishingly small. Recent litigation in the Subway system has raised virtually every conceivable challenge (plus some previously inconceivable ones) to the franchise agreement arbitration clause; and the Second Circuit has resoundingly rejected, often more than once, every argument against arbitrability22. One of the Second Circuit's most recent Subway arbitration rulings, Doctor's Associates, Inc. (DAI) v. Hamilton,23 established that unlike judicial forum selection clauses, an arbitration agreement's choice of forum should generally be immune from attack. In 1999, the Fifth and Seventh Circuits followed the Second Circuit's lead in earlier Subway cases, issuing decisions that further underscore the dependability of arbitration clauses as a risk management tool.24

Doctor's Associates, Inc. v. Hamilton

Hamilton sued Doctor's Associates, Inc. (DAI) in New Jersey state court, claiming fraud and violations of the New Jersey Franchise Practices Act and seeking "over $1 million in actual and punitive damages in addition to attorney's fees."25 DAI responded by filing in the Connecticut federal court a petition to compel arbitration under FAA section 4 and a motion to enjoin Hamilton from prosecuting his New jersey case. After the federal action was under way, the New Jersey court granted DAI's motion to stay the state case - not pending arbitration, but pending the federal court's ruling on DAI's petition to compel.26

The franchise agreement required arbitration in Bridgeport, Connecticut. In the federal action , Hamilton, relying on Kubis, asserted that this arbitral forum selection clause was unenforceable under New Jersey law. The district court rejected that argument, compelled arbitration, and enjoined the New Jersey suit, and the Second Circuit affirmed.

Writing for a unanimous panel, Judge Meskill emphasized that the strong federal "policy favoring arbitration is reflected in the narrow role played by state law in FAA jurisprudence."27 He reviewed the U.S. Supreme Court's decisions in Southland,28, Perry v. Thomas,29 and Casarotto30 and concluded:

In short, the Court has declared that only "generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening §2." Doctor's Assocs. V. Casarotto 517 U.S. 681,687 (1996). In addition, the Supreme Court has found "nothing in the Act indicating that the broad principle of enforceability [of arbitration agreements] is subject to any additional limitation under state law." Southland, 465 U.S. at 11.31

With these clear percepts in mind, the Second Circuit dispatched the argument that Kubis prevented enforcement of the arbitral forum selection clause:

Kubis did not establish a "generally applicable" contract defense that applies to "any" contract; it invalidated a franchise agreement's forum selection clause under the New Jersey Franchise Practices Act because it required the franchisee to sue in another jurisdiction. The Kubis decision applies to one sort of contract provision (forum selection) in only one type of contract (a franchise agreement). Therefore, to the extent that Kubis can be read to invalidate arbitral forum selection clauses in franchise agreements, it is preempted by the FAA.32

Subway Equipment Leasing Corp. v. Forte

In Forte,33 the Fifth Circuit endorsed the Second Circuit's analysis in the two DAI v. Distajo34 decisions and held that DAI had not waived its right to arbitrate, even though the company's affiliates had sued the plaintiff first and had even put him into involuntary bankruptcy, causing a delay of almost a decade in the progress of his arbitration against DAI. Largely relying on Distajo I and II, Judge Jolly declared for a unanimous panel that only previous litigation of the same claims that the party later seeks to arbitrate can constitute a waiver under the FAA.35 Because there had been no litigation on the merits of the claims that DAI wanted to arbitrate, the Fifth Circuit reversed the district court's ruling that DAI, through the activities of its affiliates, had waived its right to arbitrate.36

In order to explain Forte's significance, it is necessary to set forth in some detail the litigation's complex, multiforum procedural history. Earl Sims, his wife, and various partners (including the Fortes) operated four Subway franchises in Louisiana in the mid-1980s.37 They signed franchise agreements with DAI, equipment leases with a DAI affiliate, and real estate subleases with two other DAI affiliates. The franchise agreements had the standard Subway arbitration clause, but neither the equipment leases nor the real estate sublease included arbitration provisions.

Sims was also the Subway Development Agent (DA) for the Baton Rouge area, pursuant to a separate contract with DAI that, like the franchise agreements, contained an arbitration clause. DAI temporarily assigned Sims to develop the New Orleans territory, too. "[M]uch to his displeasure," however, in March 1988 Sims "was replaced by another D.A. in the New Orleans area"; two months later he filed an arbitration demand with the American Arbitration Association (AAA) in Connecticut, "claiming that DAI had breached the D.A. agreement. Subsequently, the franchisees defaulted on their real estate and equipment leases. Shortly thereafter, the litigation began in earnest."38

First, two of DAI's affiliates sued the franchisees in federal court, seeking to recover amounts owing for real estate and equipment rent at one of the stores.39 As the Fifth Circuit noted, the affiliates' claims were not for breach of the franchise agreement, but rather were "under their respective contracts with the franchisees, for which there were no arbitration clauses."40 Sims and his partners "responded by filing what they styled as a counterclaim against DAI and ... one of DAI's principals," alleging breaches of the DA agreement like those that Sims had asserted against DAI in the Connecticut arbitration.41

DAI's affiliates then put Sims and his partners into bankruptcy. This happened in 1990; the bankruptcy proceedings did not conclude until 1996.42 Before they did, the Fifth Circuit had decided an earlier appeal, reversing a decision of the district court that the affiliates were DAI's alter egos, "not separate entities for purposes of 11 U.S.C. §303(b)(1)," and therefore did not satisfy the three-creditor requirement for commencing an involuntary bankruptcy.43

Meanwhile, Sims also sued DAI twice in Louisiana state court, first in East Baton Rouge Parish and then in Orleans Parish; DAI removed the latter action to federal court, where it was consolidated with the case originally brought by DAI's affiliates.44 All this litigation, federal and state, was stayed pending the bankruptcy. During the bankruptcy, DAI never took the position that any of Sim's claims were arbitrable and did nothing to encourage prosecution of his Connecticut arbitration. Quite the contrary: "pursuant to a letter sent by counsel for DAI, the AAA decided to hold Earl Sm's arbitration in abeyance until the bankruptcy proceedings were resolved."45 It was also essential to the ultimate outcome, however, that there had never been any litigation on the merits of the claims that DAI was seeking to arbitrate.46 Indeed, Sim's principal complaint before the Fifth Circuit was the protracted lack of activity on his claims.47

When the bankruptcy finally ended, Sims began to press his state and federal lawsuits. Pursuant to FAA section 3, DAI moved to stay each case in favor of arbitration. In a striking reversal of form, the district court for East Baton Rouge Parish "granted DAI's motion to stay the matter pending arbitration," but the federal court "denied the motion, reasoning that DAI waived its right to compel arbitration."48 Without any real analysis of either the facts or the law, Judge Carr concluded: "[The] disputes in these actions were not arbitrated at their inception because of the actions of the Subway entities. Movants invoked the judicial process, in this court, creating an eight-year delay that has prejudiced the opposing parties. Movants, the Subway entities, waived their right to arbitration."49

The Forte panel began its analysis by reiterating the "strong presumption against waiver of arbitration," and emphasizing the Fifth Circuit's " 'hesitation to find that a party has waived it contractual right to arbitration.'"50 Next, the court quoted with approval the Second Circuit's observation in Distajo II that "prejudice," a prerequisite for a waiver finding in both the Second and Fifth Circuits, "'refers to the inherent unfairness - in terms of delay, expense or damage to a party's legal position - that occurs when the party's opponent forces it to litigate an issue and later seeks to arbitrate that same issue.'"51

Sims and his partners contended that DAI had "invoked the judicial process" when its affiliates brought the collection action and then put them into bankruptcy, because "DAI and its affiliates are so related, and the claims brought by the affiliates so inextricably intertwined."52 The Fifth Circuit emphatically disagreed: "We hold today that a party only invokes the judicial process to the extent it litigates a specific claim it subsequently seeks to arbitrate."53

Significantly, the court viewed the precise relationship between DAI and its affiliates as irrelevant. "Because the actions brought by the DAI affiliates involved claims that are different from the one DAI now seeks to arbitrate," Judge Jolly explained, "it does not matter whether DAI's affiliates were the alter ego, agent or precursor to DAI. Even if the affiliates and DAI were one and the same, DAI still would not have invoked the judicial process."54

The Forte panel rejected as well the claim that DAI had "invoked" the judicial process "by using the bankruptcy proceeding as an excuse to delay the ... arbitration."55 This argument failed on the facts, because even though the bankruptcy did not automatically stay the arbitration, "the franchisees never objected to" putting that proceeding on hold.56 Under those circumstances, the court refused to "construe a decision to delay arbitration as prejudicial to the franchisees."57

Finally, the Fifth Circuit also accepted DAI's argument that, even though its affiliates had "no right to arbitrate the claims brought against them by the franchisees, the district court should stay the litigation with respect to them as well."58 Judge Jolly observed: "Although the DAI affiliates themselves have not right to arbitration, the claim brought by the franchisees is based entirely on the franchisees' rights under the D.A. contract. We therefore fail to see how litigation could proceed on the franchisees' claims without adversely affecting DAI's right to arbitration."59

Forte unquestionably arose from a peculiar set of facts, but it captures a fundamental, and universally applicable, concept in the law of arbitration waiver. Waiver is a claim-specific, and parties to arbitration agreements have the right to make continuing decisions to arbitrate or litigate specific claims. Thus, as several other courts had recognized previously, even when a party to an arbitration agreement has waived its right to arbitrate a given set of claims by actively participating in litigation of those claims, its right to arbitrate revives if the other side seeks to amend its complaint to assert a materially different cause of action, or files a separate case asserting new claims, or if a defendant pleads a new counterclaim that substantially changes the nature and scope of the lawsuit.60

We Care Hair Development, Inc. v. Engen

With the Fourth Circuit's reversal of the Broussard v. Meineke61 jury verdict, franchisors may feel that the potentially mortal threat of class actions has now ebbed. They may well be right, but several prominent systems are still locked in contentious class litigation before district courts in other circuits, and Broussard's effect, if any, on state court class actions is yet to be determined. Amidst this uncertainty, the Seventh Circuit's recent decision We Care Hair Development, In c. (We Care Hair) v. Engen62 shows that an arbitration clause remains the franchisor's most surely effective "class action shield."63

DAI's principals used to own part of We Care Hair, a franchisor of hair salons. Not long after the Connecticut district court, in DAI v. Hollingsworth,64 stopped an attempted state court class action against DAI's owners, affiliates, and various vendors to Subway franchisees (alleging irregularities with the system's advertising fund), the same lawyer brought another class action, once again in state court in Madison County, Illinois, this time on behalf of We Care Hair franchisees against DAI, its owners, We Care Hair, and several other defendants.65 The plaintiffs were a putative class of We Care Hair franchisees.

The vast majority of named class representatives were not from Illinois, none of the Illinois resident representatives were from Madison County, and We Care Hair had never sold a franchise there. The Illinois appellate court ultimately ordered the case transferred to Cook County (where the franchisor was headquartered) on forum non conveniens grounds.

In the meantime, however, We Care Hair moved to enforce the arbitration clause in its franchise agreements. Because the contract designated Chicago as the site of arbitration, We Care Hair brought in the U.S. District Court for the Northern District of Illinois FAA section 4 petitions to compel arbitration against each named state court plaintiff who resided outside Illinois.66 Judge Gottschall granted the petitions and enjoined those franchisees from participating in the state court lawsuit, and the Seventh Circuit affirmed.67

As in the litigation over the Subway arbitration clause, the franchisees asserted in the federal appeal that the arbitration clause was unconscionable and thus unenforceable, because their real estate subleases with the franchisor's affiliate contained no arbitration clause but included a "cross-default" clause which allowed the affiliate to sue for breaches of the franchise agreement.68

Like the Second Circuit before it, the Seventh Circuit rejected this argument out of hand. Writing for a unanimous panel, Judge Harlington Wood, Jr., noted that in deciding unconscionability claims, "'Illinois courts look to the circumstances existing at the time of the contract's formation, including the relative bargaining positions of the parties and whether the provision's operation would result in unfair surprise.'"69 The Seventh Circuit held that, because the terms of the contract were fully disclosed in the offering circular and the franchisees were "businesspeople," "[w]e cannot conclude that, in acquiring their franchises, the franchisees were 'forced to swallow unpalatable terms.' The arbitration clauses, even when coupled with the cross-default provisions of the subleases, are not unconscionable."70


The Second Circuit's Subway decisions, Forte, and Engen all demonstrate that, with careful drafting and measured enforcement of contract terms, a franchisor should be able to structure franchise agreements and auxiliary contracts so that it (or its affiliates) can litigate certain types of claims, while preserving its right to require franchisees to arbitrate their claims against the franchisor.

Franchisee advocates will protest that this is just not fair - an example of large corporations taking advantage of unwitting victims and "having it both ways." Because certain judges might well agree,71 it bears repeating that careful drafting, measured enforcement, and appropriate forum selection are critical to the success of this approach, as is communicating an accurate picture of the franchise relationship.72

Populist rhetoric aside, franchisees pay substantial sums of money to acquire rights - and incur obligations - to own and operate business enterprises. They are afforded ample opportunity to review in advance franchise agreements and otherwise make informed judgments about whether to get involved in a particular franchise system. Moreover, the law has long since recognized that in commercial relationships, as long as the contract as a whole is supported by adequate consideration, the parties' rights and remedies need not be symmetrical.73

In Distajo II, several of the franchisees that later sued DAI in state court had lost possession of their stores through eviction actions by DAI's real estate affiliates, and DAI had "stipulated to responsibility for such actions."74 The Second Circuit nonetheless held "that DAI did not waive its right to arbitrate because in none of the eviction proceedings - even those four actions in which DAI won judgments of eviction - did DAI engage in litigation on the merits of the issues now raised" by the franchisees.75

The Second Circuit was persuaded by DAI's argument that:

[t]here is no conceivable policy justification for a rule that, by exercising the reasonable business judgment to sue to evict someone from leased premises or to collect a debt ... a party waives for all time its right to arbitrate every other dispute imaginable, including multi-million dollar punitive damage claims of which the party has no knowledge when it files the eviction action.76

After Distajo II, Forte, and Engen, no matter how much litigation there may have been on other issues, whether pursuant to the franchise agreement or some ancillary contract, if a franchisee asserts new claims that the franchisor has not litigated and wants to arbitrate, the franchisor should be able to get those claims into arbitration.

Jury Trial Waivers

It is no mystery why an increasing number of franchisors are including jury trial waivers among their standard contract terms. These provisions eliminate the principal drawback of litigation while preserving its prime advantages over arbitration: dispositive motion practice, rules of evidence, and meaningful appellate review. Along with a forum selection clause and a damage cap, a jury trial waiver would seem to give the franchisor a virtually perfect risk management world - at least on paper. In considering jury trial waivers, however, franchisors should move beyond theory and focus on the real world fact that the enforceability of these provisions will be determined case by case, under standards whose application can be influenced greatly by judges' personal views of what is fair.

Some state statutes expressly prohibit jury trial waivers in certain categories of franchise agreements,77 and as Kubis showed, courts are not always cabined by the express statutory language. This means that the enforceability of a jury trial waiver will often depend upon the particular court's public policy slant. In Mitsubishi Motor Sales of America, Inc. v. Portsmouth Imports, Inc.,78 for example, the court interpreted a statutory provision guaranteeing automobile franchisees the right to any proceedings under the laws of New Hampshire as a bar on contract provisions waiving the right to trial by jury. Similarly, in Goodyear Tire & Rubber Co. v. Tualatin Tire and Auto, Inc. ,79 the Oregon Supreme Court construed the public policy behind the state's franchise act and concluded that franchise agreement jury trial waivers are unenforceable, even though the statute has no provision addressing the issue.

The Georgia Supreme Court, relying upon an article of the state constitution declaring that the "right to a trial by jury shall remain inviolate,"80 has held that all contractual jury trial waivers are unenforceable in Georgia.81 That is an extreme and, to date, unusual position. Most states have similar constitutional provisions or statutes to the same effect, but a contractual jury trial waiver is not automatically void in these jurisdictions.

In fact, "[t]he majority of jurisdictions that have addressed prelitigation contractual jury trial waivers had concluded that such waivers generally enforceable."82 Most courts considering the issue have adopted the test from National Equipment Rental, Ltd. v. Hendrix,83 which conditions enforcement of a jury trial waiver on a factual finding that the waiver was knowing, voluntary, and intelligent.

The Second, Fourth, and Tenth Circuits, and many federal district courts, have held that the party seeking to enforce a jury trial waiver has the burden of demonstrating that the other party acted with the requisite state of mind.84 This rule stems from the U.S. Supreme Court's pronouncement that, "as the right of jury trial is fundamental, courts [should] indulge every reasonable presumption against waiver."85

The Sixth Circuit imposes the burden on the party objecting to the jury trial waiver. In KMC Co. v. Irving Trust Co.,86 the court reasoned that, in light of the strong policy favoring liberty of contract, "in the context of an express contractual waiver the objecting party should have the burden of demonstrating that its consent to the provision was not knowing and voluntary."87

Regardless of who shoulders the burden, federal courts determining whether a jury trial waiver was made knowingly, voluntarily, and intelligently consider: (1) whether the jury waiver clause was conspicuous or buried in the contract;(2) whether the clause, the contract or both were negotiable; (3) the parties' relative bargaining power; (4) the business experience of the parties; and (5) whether the waiving party retained counsel in executing the contract. To state the obvious, many jury trial waivers in standard form franchise agreements could encounter major difficulty passing that test.

It is also striking that, although one inescapable effect of an arbitration clause is waiver of trial by jury, under the FAA, "[a]s a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay or a like defense to arbitration."88 Thus, arbitration agreements are routinely enforced; even when the clause was inconspicuous and never negotiated, there was clearly disparate bargaining power and the franchisee never had a lawyer review the agreement. This highlights again the special status of agreements to arbitrate.

Representative Case Law

In Hendrix, the Second Circuit refused to enforce a jury waiver because it appeared in the middle of the contract, in fine print; there was no showing that the waiving party was actually aware of the waiver and its significance when the contract was executed, and no showing that the waiving party had any choice in view of its difficult financial situation. On the other hand, in Leasing Service Corp. v. Crane,89 the Fourth Circuit distinguished Hendrix and enforced the waiver, even though the clause appeared in fine print on the back of a form leasing agreement and was clearly not conspicuous.90 Leasing Service Corp. turned on the extensive business experience of the waiving party and the fact that the parties had negotiated other contract terms. The pattern is no more consistent in franchise cases involving jury trial waivers.

In Dreiling v. Peugeot Motors of America, Inc. ,91 the court declared a jury trial waiver in an automobile dealership agreement invalid because the manufacturer had failed to prove that the dealer knowingly, voluntarily, and intentionally agreed to the provision. The court concluded that unless the party invoking the clause could show that it was expressly brought to the other party's attention, the waiver was unenforceable.

In Smyly and Smyly Hyundai, Inc. v. Hyundai Motor America,92 the result was just the opposite. There, the jury waiver was a standard term used in Hyundai's contracts nationwide, and there was no indication that it was negotiable. The clause was, however, conspicuously set out and identified in capital letters in the agreement's table of contents. In addition, the plaintiff had not read the contract, even though he was an experienced businessman who owned other dealerships, and he made no showing that if he had read the waiver, he would not have signed the agreement. The court concluded that a jury trial waiver was not uncommon or unreasonable in such a transaction and enforced the clause.

Two cases from the AAMCO system, decided within a year of each other, also illustrate the uncertain fate of jury trial waivers. In Bonfield v. Aamco Transmission, Inc. ,93 the franchisee argued that he had not understood the effect of his contractual jury waiver, even though the franchisor had told him that jury waivers were intended to curb "large verdict." The court was unimpressed, remaking that if the talk of "large verdicts ... did not grab [his] attention, nothing would," and also rejected the franchisee's claim that the clause failed for lack of negotiation, giving his admission that he had retained counsel but had not asked his lawyer to read the franchise agreement.

In Aamco Transmissions v. Marino,94 however, the court refused to enforce the jury trial waiver simply because it had not been negotiable.

The Connecticut Supreme Court's 1998 decision in L&R Realty v. Connecticut National Bank95 may influence future litigation about the enforceability of jury trial waivers, especially in state court. Several aspects of Justice Katz's opinion, written for a unanimous court, are noteworthy. First, she began her analysis by observing "that jury trial waivers entered into in advance of litigation are similar to arbitration agreements in that both involve the relinquishment of the right to have a jury decide the facts of the case."96 As the L&R- Realty court said, "[a]rbitration agreements illustrate the strong public policy favoring freedom of contract and the efficient resolution of disputes. These policies are also furthered by a jury trial waiver clause."97

Second, after endorsing the multifactor test, discussed above, that other courts have applied to jury trial waivers, the Connecticut Supreme Court pointed out that:

Evidence regarding the conspicuousness of the waiver clause would likely be apparent on the face of the agreement. Information regarding the remaining factors, however, is more likely to be in the hands of the party seeking to avoid enforcement of the jury trial waiver. It is, therefore, appropriate to place the burden of production as to those factors on the party seeking to avoid enforcement of the waiver.98

The court held, "in accordance with our public policy favoring freedom of contract and the efficient resolution of disputes," that "express commercial contractual jury trial waivers entered into prior to litigation are presumptively enforceable."99 To rebut this presumption in Connecticut, the party trying to escape the waiver must "come forward with evidence that there was an inequality of bargaining power, that he or she was not represented by counsel, or other evidence indicating a lack of intent to be bound by the waiver."100 The trial court must then "hold a hearing at which additional evidence may be received" and "the party seeking to avoid the waiver carries the burden of proving, by a preponderance of the evidence, the lack of a clear intent to be bound by the waiver provision."101

On the specific facts of L&R Realty, the Connecticut Supreme Court concluded that no evidentiary hearing was necessary, because "the party seeking to avoid enforcement of the waiver has not claimed that there was no consent to the waiver."102 In a typical franchise case, however, the franchisee challenging the waiver will argue that the clause was not negotiable, that the parties' bargaining power was wildly disparate, and that the franchisee was a business novice without legal representation. Even under the L&R Realty test, with its presumption in favor of enforcing jury trial waivers, those claims would lead to an evidentiary hearing of uncertain outcome.

Damage Caps

A leading treatise on franchise law advises that "[a] franchise agreement may limit, condition or shape the damages recoverable by either party in the event of litigation between them."103 In practice, however, life may not be so simple. Because many legislatures and courts are so concerned about the bargaining power of franchisees, and troubled by franchisor attempts to plate themselves with nonnegotiable contract terms, damage caps are likely on a par with forum selection clauses and jury trial waivers: they are provably never enforceable in certain jurisdictions, and elsewhere their fate will often depend on an unpredictable, case-by-case analysis.

Factors in the Analysis

Courts have cited numerous factors to support decisions enforcing damage caps, including:

  • A perception that the provision reflected an allocation of risk between the parties;
  • The presence of sophisticated parties
  • The commercial context of the transaction;
  • The prominent and unambiguous language of the provision;
  • That the limitation would not be unconscionable under the Uniform Commercial Code (UCC); and
  • That there was a renewal of the agreement, without objection by the party later challenging the provision.104

The absence of even some of these factors may threaten the enforceability of a damage cap in certain jurisdictions. If the franchise agreement is a standard form document (and thus reflects no negotiated allocation of risk),. The franchisee is unsophisticated and had no relevant business experience, and the language is inconspicuous or difficult to follow, many judges will be reluctant to enforce the clause. As one prominent franchise lawyer has put it, franchisor executives and their counsel tend to believe about their contracts, "if you write it, you can do it"; but in reality, "if you write it, you can do it, if it's fair."105 And what is "fair" will often be decided by people whose view of the word diverges sharply from that of franchisors, under inherently elastic doctrines like mutuality and unconscionability.

Most courts now recognize that the old doctrines of "mutuality of obligation" and "mutuality of remedy" are "dead letters."106 The modern test is not the symmetry of particular clauses, but whether the entire contract is supported by adequate consideration.107 This is by far the better view, but not a universal one.108 If the franchise agreement purports to afford the franchisor a wide variety of remedies while capping the franchisee's damages at a level that would clearly not make him or her whole in the event the unit fails, in certain jurisdictions mutuality would still give judges so inclined a means of redressing the imbalance.

In numerous jurisdictions, the doctrine of unconscionability would not help a franchisee overturn a damage cap; many courts would no doubt agree with Judge Posner's observation that franchisees are "not vulnerable consumers or helpless workers" but "businesspeople," who are free not to purchase a franchise and are therefore not "forced to swallow unpalatable terms."109 As the Second Circuit has recognized, the "purpose of the unconsionability doctrine is to prevent unfair surprise and oppression," and in recent franchise cases that court has focused on whether the challenged contract term ""ambush[ed]""the "complaining party.110 The Second Circuit's standard contemplates a series of subjective value judgments that give courts great flexibility in the face of contract terms that offend them:

Originating in Equity as a form of relief against the harshness of penal bounds, th[e] doctrine [of unconsionability] has been employed by courts to deny enforcement to harsh and unreasonable contract terms. An unconsionable bargain is one which no man in his senses and not under delusion would make on the one hand, and ... no honest and fair man would accept on the other.

The doctrine was forged to protect against unfair bargains and unfair bargaining practices. Unconsionability is determined by reference to the relative benefit of the bargain to the parties at the time of its making, the nature of the methods employed in negotiating it, and the relative bargaining power of the parties.111

One can imagine many judges, especially in certain state courts, relying on that very language to strike down a franchise agreement damage cap. In addition, depending upon the specific language of the damage limit, it may apply only to breach of contract claims and have no impact on tort or statutory causes of action.112 And in at least eleven states, judges would have either an express statutory basis or some colorable statutory support for striking down a damage cap, in the antiwaiver provisions of state franchise acts.113

Representative Case Law

In Cognitest Corp. v. Riverside Publishing Co. ,114 the Seventh Circuit held that a liquidated damages clause and limitation on damages provision in an exclusive software distribution contract precluded the manufacturer from recovering lost profits as a result of the distributor's alleged breach. The court applied the UCC and found that the contract was not unconsionable, because it was a commercial agreement that provided for a minimum adequate remedy and resulted from substantial negotiation. In Beitzell & Co. v. Brown-Forman Corp.,115 the court upheld a contractual limitation on a liquor supplier's liability for the termination of a distributorship agreement. However, the court based its decision in part on the distributor's failure to allege that the provision was unconsionable under the UCC.116

Similarly, in Stanley A. Klopp, Inc. v. John Deere Co.,117 the court held that although there was inequality of bargaining power between the manufacturer and the distributor and no negotiation of the distributorship agreement, a provision that barred recovery of future profits in the event of termination would be enforced because it was a term in a commercial agreement that the parties had previously renewed. The Klopp court relied heavily upon Phillips Machinery Co. v. LeBlond,118 which held that a similar damage cap in a distributorship agreement barred the collection of lost profits even where a manufacturer has terminated the contract in bad faith. Both courts rule that the test is whether the clause is unconscionable at the time of contract and that later events are therefore irrelevant.

In contrast, the Ninth Circuit recently held that an arbitration clause in an agreement with a gasoline distributor violated the Federal Petroleum Marketing Practices Act by, among other thins, forcing the franchisee to forfeit its right to collect, as mandated by statute, exemplary damages.119

As noted above, depending on the precise contract language, the damage cap may not even come into play if the franchisee sues for fraud or violation of a state's "baby" FTC Act.120

Courts may also construe a damage cap narrowly to avoid its effect. In Atlantic Sport Boat Sales, Inc. v. Cigarette Racing Team,121 for example, a distribution agreement provided that the manufacturer would not be liable "by virtue of the expiration or termination of this Agreement for any reason whatsoever..." The court denied the manufacturer's summary judgment motion on damages, reasoning that the provision could be interpreted to preclude recovery of damages only in the event of lawful expiration or termination. Although another court122 had concluded that this construction would render such a provision meaningless, the Atlantic Sport court was unconvinced.

In addition, unless a damage cap unambiguously excludes all damages, those damages not expressly excluded will be available, which may mean that a plaintiff can avoid the limit simply by pinning a new label on its damage claim.123 Recently, for example, one court rules that even though a franchise agreement limited the collection of royalties and fees to the life of the contract, this would not affect a damage claim for future lost profits.124 And an Arizona court has held that although a distribution agreement limited the manufacturer's liability for incidental and consequential damages in suits with its distributor, this provision did not relieve the manufacturer of its indemnification responsibilities to the distributor.125


This article has reviewed the law on franchise agreement risk management clauses where that law now is - not where it ought to be. As a theoretical matter, the elevated status of arbitration agreements is difficult to justify. This is not to suggest that arbitration clauses should be enforced less rigorously: the current state of the law under the FAA is fully consistent with congressional intent, sensible public policy, and reasonable commercial practice, and many thousands of business relationships have come to depend upon arbitration for relatively prompt, efficient, and inexpensive resolution of disputes. The question, instead, is why judicial forum selection clauses, jury trial waivers, and damage caps in franchise and other business contracts should not be upheld with the same regularity as agreements to arbitrate.

For as Chief Justice Rehnquist emphasized in Volt Informational Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ.,126"[t]he FAA was designed 'to overrule the judiciary's long-standing refusal to enforce agreements to arbitrate and to place such agreements on the same footing as other contracts."127 The statute "simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms."128 Federal judges have taken this stricture deeply to heart, embracing with almost religious fervor the sanctity of contract when it comes to arbitration agreements. Yet in most courts, state and federal, the other risk management provisions receive decidedly different treatment, with judges applying unwieldy, multifactor tests and often substituting their own views of what is fair for the contract terms to which the parties actually agreed.129

Franchisors committed to jury trial waivers, damage caps, and judicial forum selection clauses should study closely the Connecticut Supreme Court's decision in L&R Realty, which stressed enforcement of arbitration agreements as an illustration of "the strong public policy favoring freedom of contract,"130 to justify the presumptive validity of jury trial waivers. In theory, this "strong public policy" applies with equal force to the other clauses considered in this article.

Franchising exists, however, in the real world, not the land of theory, and the real world includes numerous state statutes and well-developed bodies of precedent that complicate, or prohibit outright, enforcement of judicial forum selection clauses, jury trial waivers, and damage caps. There is scant prospect for repeal of those statutes; the desire of many judges to guard local citizens against the perceived predations of large corporations is unlikely to wane; no one is suggesting that Congress pass legislation akin to the FAA, preempting the field and securing for these other contract terms the same hallowed standing that arbitration clauses now enjoy; and at least among federal judges in commercial cases, the enthusiasm for the docket-clearing benefits of arbitration is probably here to stay.131


1. See, e.g., Burger King Corp. v. C.R. Weaver, 169 F.3d 1310, Bus. Franchise Guide (CCH) ¶ 11,592 (5th Cir. 1999); Scheck v. Burger King Corp., 756 F.Supp. 543, Bus. Franchise Guide (CCH) ¶ 9,760 (S.D. Fla. 1991); Scheck v. Burger King Corp., 798 F. Supp. 692, Bus. Franchise Guide (CCH) ¶ 9,759 (S.D. Fla. 1992); Barnes v. Burger King Corp., 932 F. Supp. 1420, Bus. Franchise Guide (CCH) ¶ 10,932 (S.D. Fla. 1996); Burger King Corp. v. Holder, 844 F. Supp. 1528 (S.D. Fla. 1993).
2. The litigation over the Subway arbitration clause is discussed infra; see note 22 for the full case citations.
3. See Broussard v. Meineke Discount Muffler Shops, Inc., 958 F. Supp. 1087, Bus. Franchise Guide (CCH) ¶ 11,125 (W.D.N.C. 1997), rev'd, 155 F.3d 331, Bus. Franchise Guide (CCH) ¶ 11,459 (4th Cir. 1998); Little Caesar Enter, Inc. v. Smith, 172 F.R.D. 236, Bus. Franchise Guide (CCH) ¶ 11,164 (E.D. Mich. 1997); Collins v. International Dairy Queen, Inc., 2 F. Supp. 1465, Bus. Franchise Guide (CCH) ¶ 11,368 (M.D. Ga. 1998).
4. Arbitration clauses in employment agreements are now coming under closer scrutiny as courts try to ensure a "level playing field." See Nat'l L.J., Aug. 23, 1999, at B21.
5. 811 F.2d 326, Bus. Franchise Guide (CCH) ¶ 8760 (7th Cir. 1987).
6. Id. at 329.
7. Id. at 336.
8. Id. at 337.
9. 830 F. Supp. 1045 (N.D. Ohio 1993), aff'd, 48 F.3d 201 (6th Cir. 1995).
10. Id. at 1051-53.
11. Section 3 of the FAA provides: If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration. Id.
12. 982 F. Supp. 609 (N.D. Ill. 1997).
13. See also Coburn v. Grabowski, Civ. No. 960134935, 1997 WL 309572 (Conn. Super. May 29, 1997); Citibank N.A. v. Bankers Trust Co., 633 N.Y.S.2d 314 (1995).
14. Local 808 v. National Mediation Bd., 888 F.2d 1428, 1430 (D.C. Cir. 1989)(internal quotations and citations omitted).
15. See Edward Wood Dunham, et al., Franchisor Attempts to Control the Dispute Resolution Forum: Why the Federal Arbitration Act Trumps the New Jersey Supreme Court's Decisions in Kubis, 29 Rutgers L.J. 237, 248-52 (1998); Mark R. Kravitz and Edward Wood Dunham, Compelling Arbitration, LITIGATION, Fall 1996, at 34.
16. There can, of course, always be some extremely unusual combination of facts that would make a court overturn an arbitration clause. Generally speaking, however, only a party's extended litigation on the merits of the same claims that it now seeks to arbitrate is likely to put the arbitration clause at risk, unless there are mistakes in the attempt to enforce the clause. If a franchisor is sued by a franchisee, and then conducts discovery and files substantive motions before invoking an arbitration clause, the franchisee's waiver argument will be strong and the franchisor may well pay a price for trying to have it both ways. But see Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324, Bus. Franchise Guide (CCH) ¶ 11,600 (5th Cir. 1999); Doctor's Assocs. Inc. v. Distajo, 944 F. Supp. 1010, Bus. Franchise Guide (CCH) ¶ 10,858 (D. Conn. 1996), aff'd, 107 F.3d 126, Bus. Franchise Guide (CCH) ¶ 11,108 (2d Cir. 1996) cert. denied, 118 S. Ct. 365 (1997) (Distajo II) discussed infra (each holding that prior litigation against franchisees by franchisor's affiliates did not waive franchisor's right to arbitrate current claims of franchisees, since current claims were not at issue in earlier suits and franchisor had promptly sought arbitration of those claims).
17. See Dunham et al., supra note 15, at 248-52. See also Benjamin A. Levin and Richard S. Morrison, Kubis and the Changing Landscape of Forum Selection Clauses, 16 Franchise L.J., 97 (1997).
18. Kubis & Perszyk Ass'n, Inc. v. SunMicrosys., Inc., 680 A.2d 618, Bus. Franchise Guide (CCH) ¶ 10,980 (N.J. 1996).
19. Dunham et al, supra note 15, at 247. Notwithstanding the New Jersey Supreme Court's position about the rights of New Jersey franchisees, a New Jersey federal court recently enforced a franchise agreement clause requiring litigation in New Jersey over the objection of a Howard Johnson's franchisee from Georgia, who had moved to dismiss and in the alternative to transfer the case to the Middle District of Georgia. Howard Johnson Int'l, Inc. v. Dorminey, Bus. Franchise Guide (CCH) ¶ 115,559 (D.N.J. 1998). Judge Bressler concluded that the motivation for Kubis was simply "to protect New Jersey franchisees"; noted that the New Jersey Franchise Practices Act did not cover "non-New Jersey franchises"; and relied on the Supreme Court's decisions in M/S Bremen v. Zapata Offshore Co., 407 U.S. 1 (1972), and Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, Bus. Franchise Guide (CCH) ¶ 9797 (1991) to enforce the clause.
20. Dunham et al., supra note 15, at 242.
21. Dunham et al., supra note 15, at 244. Compare, for example, DFO, Inc. v. Northeast Inn of Meridian, Inc., Bus. Franchise Guide (CCH) ¶ 11,552 (C.D. Cal. 1998) (enforcing forum selection clause in Denny's franchise agreement) with Best Buy Co. v. Smith & Alster, Inc., Bus. Franchise Guide (CCH) ¶ 11,556 (Minn. Ct. App. 1998) (holding that trial court had not abused its discretion by refusing to enforce New York forum selection clause, because the case involved multiple parties and the clause was " 'against public policy' favoring judicial economy").
22. The Second Circuit decided nine appeals in these Subway cases in less than three years. In chronological order, they were Doctor's Assocs., Inc. v. Distajo, 66 F.3d 438, Bus. Franchise Guide (CCH) ¶ 10,756 (2d Cir. 1995), cert. denied, 116 S. Ct. 1352 (1996) (Distajo I); Doctor's Assocs., Inc. v. Stuart, 85 F.3d 975, Bus. Franchise Guide (CCH) ¶ 10,858 (D. Conn. 1996), aff'd, 107 F.3d 126, Bus. Franchise Guide (CCH) ¶ 11,108 (2d Cir.), cert. denied, 118 S. Ct. 365 (1997) (Distajo II); Doctor's Assocs., Inc. v. Riggs, No. 96-9141 (2d Dir. June 10, 1997), 96-9141 (2d Dir. June 10, 1997), cert. denied, 118 S. Ct. 365 (1997) (Riggs I); Doctor's Assocs., Inc. v. Hollingsworth, 949 F. Supp. 77, Bus. Franchise Guide (CCH) ¶ 11,069 (D. Conn. 1996), aff'd, No. 96-9599 (2d Cir. Feb. 5, 1998); Doctor's Assocs., Inc. v. Riggs, No. 97-7529, Bus. Franchise Guide (CCH) ¶ 11,332 (2d Cir. Feb. 5, 1998) (Riggs II); Doctor's Assocs., Inc. v. Neal, Nos. 96-7722, 97-7582, Bus. Franchise Guide (CCH) ¶ 11,330 (2d Cir. Feb.5, 1998); and Doctor's Assocs., Inc. v. Hamilton, 150 F.3d 157, Bus. Franchise Guide (CCH) ¶ 11,459 (2d Cir. 1998), cert. denied, 119 S. Ct. 867 (1999). In all these cases, the Second Circuit affirmed orders of the Connecticut district court compelling arbitration and enjoining the franchisees from prosecuting their state court lawsuits. In Distajo, full affirmance came only on the second appeal; in Jabush, the Second Circuit remanded for further proceedings, the district court again compelled arbitration and enjoined a state court lawsuit, and the franchisees withdrew their second appeal. For a sharp, critique of the Second Circuit's willingness to stop the franchisees' state court litigation, see Jean R. Sternlight, Forum Shopping for Arbitration Decisions: Federal Courts' Use of Antisuit Injunctions Against State Courts, U. Pa. L. Rev. 203 (1998).
23. Hamilton, 150 F.3d 157 (2d Cir. 1998).
24. This is not to suggest that the outcome of arbitration is predictable in any particular case, or that the result (or the process of getting it) will be satisfactory. The point is simply that with arbitration, franchisors know the odds are overwhelmingly high that they will get the forum (and thus the procedural rules) specified in their contracts.
25. Hamilton, 150 F.3d at 159.
26. Moving under FAA § 3 to stay the state action pending arbitration would have put the question of arbitrability before the state court, and an adverse ruling could have bound the federal court pursuant to the Full Faith and Credit Clause. See Distajo I, 66 F.3d at 446-51 (giving preclusive effect to Alabama ruling on arbitrability, but not to prior decisions of Illinois and North Carolina courts, owing to different nature of state court orders, as well as to Illinois law on finality of trial court rulings for purposes of issue and claim preclusion). For a discussion of the tactical considerations in dealing with the franchisees' state court action while pursuing an FAA § 4 petition, see Kravitz and Dunham, supra note 15, at 35-37. See also Im v. ATL Int'l, Inc., Bus. Franchise Guide (CCH) ¶ 11,351 (N.D. Tex. 1998).
27. Hamilton, 150 F.3d at 162.
28. Southland Corp v. Keating, 465 U.S. 1 (1984).
29. 482 U.S. 483 (1987).
30. Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996).
31. Hamilton, 150 F.3d at. 162.
32. Id. See also KKW Enterprises, Inc. v. Gloria Jean's Gourmet Coffees Franchising Corp., 1999 WL 497534 (1st Cir. July 19, 1999); Management Recruiters Int'l Inc. v. Bloor, 129 F.3d 851, Bus. Franchise Guide (CCH) ¶ 11,279 (6th Cir. 1997). For a contrary point of view, see Note, Restrictions on Forum-Selection Clauses in Franchise Agreements and the Federal Arbitration Act: Is State Law Preempted?, 51 Vand. L. Rev. 759 (1998). In the past, some leading franchisee counsel have had success persuading courts that the FAA does not require enforcement of arbitral forum selection clauses. After Hamilton, KKW, Management Recruiters, that is likely to change.
33. 169 F.3d 324 (5th Cir. 1999).
34. Distajo I, 66 F.3d 438 (2d Cir. 1995); Distajo II, 107 F.3d 126 (2d Cir. 1997).
35. Forte, 169 F.3d at 327-29.
36. Id. at 329.
37. Id. at 325.
38. Id.
39. Id.
40. Id.
41. Id. at 325-26.
42. Id. at 326.
43. Matter of Sims, 994 F.2d 210 (5th Cir. 1993).
44. Forte, 169 F.3d at 326.
45. Id.
46. Id. at 327.
47. Id. at 328.
48. Id. at 326.
49. Id. at 327.
50. Id. at 326 (internal citations omitted).
51. Id. at 327 (citing Distajo II, 107 F.3d at 134) (emphasis added).
52. Id.
53. Id. at 328.
54. Id. (emphasis added).
55. Id.
56. Id.
57. Id. In a tart passage, Judge Jolly also derided "the reasoning used by the franchisees" as "specious": As we make clear today, in order to invoke the judicial process, a party must have litigated the claim that the party now proposes to arbitrate. Here, the franchisees argue that, by asserting unrelated litigation-the bankruptcy proceeding-as a basis for delaying arbitration, DAI has "invoked the judicial process" and therefore waived its right to arbitrate. This argument, however, confuses our use of the term "invoke" in past cases. We use the term to describe the act of implementing or enforcing the judicial process, not the act of calling upon the support of assistance, as say, one would invoke a spirit or the elements. Thus, to invoke the judicial process, the waiving party...must, at the very least, engage in some overt act in court that evinces a desire to resolve the arbitrable dispute through litigation rather than arbitration. Id. at 328-29. In case that was not clear enough, Judge Jolly added in a footnote that "we cannot see a plausible reading of the term 'invoke' that would lead to our treating the 'judicial process' as if it were a specter, ghost or deity. In this context, we regard the judicial process as a mechanism: to invoke it is to implement it." Id. at 329 n.3.
58. Id. at 329.
59. Id. This ruling is consistent with all of the Second Circuit's decision in the Subway cases, and with the Seventh Circuit's decision in Kroll v. Doctor's Assocs., Inc. 3 F.3d 1167, 1171, Bus. Franchise Guide (CCH) ¶ 10,265 (7th Cir. 1993).
60. See e.g. Gingiss Int'l, Inc. v. Bormet, 58 F.3d 328, 332, Bus. Franchise Guide (CCH) ¶ 10,716 (7th Cir. 1995) (holding that franchisor did not waive the right to arbitrate franchisee's claims by filing eviction action pursuant to a separate sublease, "because that action involved different issues" than the claims being arbitrated); Cabinetree of Wis. v. Kraftmaid Cabinetry, Inc. 50 F.3d 388, 391, Bus. Franchise Guide (CCH) ¶ 10,633 (7th Cir. 1995) (citing Gilmore v. Shearson/American Express, Inc., 811 F.2d 108, 113 (2d Cir. 1987); Envirex v. K.H. Schussler Fur Umwelttechnik, 832 F. Supp. 1293, 1295-96 (E.D. Wis. 1991) (holding that licensor and codefendant did not waive their right to arbitration of licensee's claims, where licensee amended the existing complaint to allege a new basis for its fraud count and added a count for breach of warranty, because "the new allegations in the amended complaint rejuvenate their right to demand arbitration"); Realco Enter., Inc. v. Merrill Lynch, Pierce, Fenner, & Smith Inc., 738 F. Supp. 515, 518 (S.D. Ga. 1990) (rejecting argument that securities brokerage company waived right to arbitrate by previously bringing suit against investor in state court to collect a debt allegedly owing on brokerage account); Redshaw Credit Corp. v. Insurance Professionals, Inc., 709 F. Supp. 1032, 1034-36 (D. Kan. 1989) (plaintiff sued to collect monies due under a software lease; defendant filed an answer and counterclaim alleging defects in the software; plaintiff moved to stay the action pending arbitration; court rejected defendant's contention that the plaintiff waived its right to arbitrate by filing the collection action, because the subject matter of the complaint was different from that of the counterclaim, and stayed the entire case in favor of arbitration); McMahon v. Shearson/American Exp., Inc. 618 F. Supp. 384, 387 (D.C.N.Y. 1988), aff'd in part and rev'd on other grounds, 788 F.2d 94 (2d Cir. 1986), rev'd on other grounds, 482 U.S. 220 (1987) (rejecting claim that defendants waived their right to arbitrate plaintiffs' lawsuit when they sued plaintiffs in state court, because the "prior state court proceeding involve[d] issues only tangentially related to those at stake [in plaintiffs' action]"); Burns v. Olde Discount Corp., 538 N.W. 686, 689 (1995) (holding that brokerage firm's prior suit against employee while still chief executive officer of the firm did not waive firm's right to arbitrate employee's later claim for emotional distress).
61. 155 F.3d 331 (4th Cir. 1998).
62. 180 F.3d 838, Bus. Franchise Guide (CCH) ¶ 11,646 (7th Cir. 1999).
63. Edward Wood Dunham, The Arbitration Clause as Class Action Shield, 16 Franchise L.J. 141 (1997).
64. 949 F. Supp. 77 (D. Conn. 1996).
65. Engen, 1999 WL 382700, at 1.
66. Id.
67. In Hollingsworth, the federal court injunction extended to all state court plaintiffs, including those who were not parties to the federal action because they were not diverse with DAI. Under Rule 65(d) of the Federal Rules of Civil Procedure, every injunction binds not only the parties, but also their attorneys "and those persons in active concert or participation with them who receive actual notice of the order." Judge Dorsey reasoned that every sate court plaintiff was in "active concert or participation" with the franchisees that DAI sued in federal court, since all the state court plaintiffs purported to represent a class that included one another. 949 F.Supp. at 85-86. The Second Circuit summarily affirmed, but only after the district court proceedings in Engen. Judge Gottschall refused to followed the Hollingsworth district court and enter such a comprehensive injunction.
68. 180 F.3d at 840-41.
69. Id. at 843 (internal citations omitted).
70. Id. (internal citations omitted).
71. See, for example, Judge Heaney's dissent in Barker v. Golf, U.S.A., Inc. , Bus. Franchise Guide (CCH). ¶ 11,466 (8th Cir. Aug. 20, 1998) at 30,974-75 (criticizing "oppressive use" of franchisor power in one-sided arbitration agreements).
72. For an example of a clumsy - and justifiably unsuccessful - attempt to "have it both ways," consider World Wide Communications, Inc. v. Rozar, No. 96 CIV. 1056 (MBM) (NRB), 1998 U.S. Dist. LEXIS 10200 (S.D.N.Y. July 10, 1998). There, the plaintiff sued under a nonexclusive dealer agreement that contained an arbitration clause. Id. at 1-2. When the defendants asserted two counterclaims and demanded trial by jury, the plaintiff did not demand arbitration of the new claims, but rather moved to strike the jury demand, contending that the arbitration clause waived the defendant's jury trial rights. Id. at 2. Judge Buchwald was nonplussed by this argument. She pointed out that in an earlier opinion denying the plaintiff's motion to dismiss one of the counterclaims, she had given the plaintiff a date certain by which to demand arbitration or be deemed to have waived the arbitration clause; the plaintiff let the date pass because it wanted to move for summary judgment and did not want "to litigate in two forums." Id. at 4. The plaintiff also miscited one of the Second Circuit's Subway decisions and "failed to provide any authority" for the novel proposition that a waived arbitration clause somehow worked a jury trial waiver. Id. at 5-6.
73. See discussion infra of unconscionability and mutuality doctrines.
74. Distajo II, 107 F.3d at 131 n. 9.
75. Id. at 132.
76. Id. at 132-33.
77. See, e.g. , Nev. Rev. Stat. § 482.3638 (1997) and N.J. Stat. Ann. § 56:10- 7.2 (West 1997) (motor vehicle dealer agreements); and Ariz. Rev. Stat. §44-1560 (West 1997) and W.Va. Code §47-11C-3 (Mitchie 1997) (petroleum franchise agreements).
78. Bus. Franchise Guide (CCH) ¶10,956 (D.N.H. May 3, 1996).
79. 908 P.2d 300. Franchise Guide (CCH) ¶10,838 (Or. 1995).
80. Ga. Const. 1983, art. I. § XI.
81. See Bank S.N.A. v. Howard, 444 S.E.2d 799, 800 (Ga. 1994).
82. L&R Realty v. Connecticut Nat'l Bank, 715 A.2d 748, 753 (Conn. 1998).
83. 565 F.2d 255 (2d Cir. 1977).
84. See id.; Leasing Serv. Corp. v. Crane, 804 F.2d 828 (4th Cir. 1986); Telum Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835 (10th Cir. 1988), cert. denied, 490 U.S. 1021 (1989). See, e.g., Dreiling v. Peugeot Motors of Am., Inc. 539 F. Supp. 402, 403 (D. Colo. 1982) (emphasizing that the burden of proving waiver is a "very heavy" one).
85. Aetna Ins. Co. v. Kennedy to Use of Bogash, 301 U.S. 389, 393 (1937).
86. 757 F.2d 752 (6th Cir. 1985).
87. Id. at 758.
88. Moses H Cone Mem'l Hosp. V. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).
89. 804 F.2d 828 (4th Cir. 1986).
90. In many cases, courts have considered conspicuousness of a jury waiver clause as a factor in determining its validity, but this has produced few if any hard and fast rules. In Cooperative Finance Ass'n, Inc. v. Garst, 871 F. Supp. 1168 (N.D. Iowa 1995), the waiver was deemed conspicuous when it was in the same typeface as the rest of the contract because it was set off on its own not far from the signature line and just before a warning to read the entire document. Courts have considered the typeface, whether the clause was set off, whether it was in capitals, what page it was on, whether it was on the back of a page, and whether it was close to the signature line. To put it mildly, this profusion of approaches, often focused on minutiae, affords the franchisor no certainty at all that a jury trial waiver will be enforced.
91. 539 F. Supp. 402 (D. Colo. 1982).
92. 762 F. Supp. 428 (D. Mass. 1991).
93. 717 F. Supp. 589, Bus. Franchise Guide (CCH) ¶9470 (N.D. Ill. 1989).
94. CIV A. Nos. 88-5522, 88-6197, 1990 WL 10024 (E.D. Pa. Feb. 7, 1990).
95. 715 A.2d 748 (Conn. 1998).
96. Id. at 753.
97. Id.
98. Id. at 755.
99. Id.
100. Id.
101. Id. at 755-56.
102. Id. at 756. Instead, that party had simply argued that the other side "bore the burden of proving that the waiver was knowing and voluntary" and had failed to carry that burden. Id.
103. W. Michael Garner, Franchise Law And Practice, §356 (1990).
104. See representative cases discussed infra.
105. The oft-repeated observation of Judge Michael Dady. For the various reasons discussed above, the one exception to this sage rule is an arbitration clause, where subjective impressions of "fairness" rarely enter into the analysis.
106. Distajo I, 66 F.3d at 451. See S.J. Groves & Sons Co. v. State of Illinois, 444 N.E.2d 131, 67 Ill. Dec. 92 (1983), appeal dismissed sub nom. S.J. Groves & Sons Co. v. Illinois Dep't of Transp., 462 U.S. 1126 (1983), overruled on other grounds; Rosetti Contracting Co. v. Court of Claims, 485 N.E.2d 332, 92 Ill. Dec. 521 (1985); Design Benefit Plans, Inc. v. Enright, 940 F. Supp. 200, 205 (N.D. Ill. 1996).
107. See Distajo I, 66 F.3d at 451-53. See also RESTATEMENT (SECOND) OF CONTRACTS §363 cmt. C (1979).
108. See, e.g. , Lopez v. Plaza Fin. Co., No. 95-C-7567, 1996 WL 210073 (N.D. Ill. Apr. 25, 1996).
109. Original Great Am. Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd., 970 F.2d 273, 281, Bus. Franchise Guide (CCH) ¶ 10,042 (7th Cir. 1992).
110. Stuart, 85 F.3d at 980 (internal citations and quotations omitted) rejecting unconscionability defense to arbitration).
111. Jabush, 89 F.3d at 113 (emphasis in original) (internal quotations and citations omitted). 112. If, for example, the claim is fraudulent inducement of the franchise agreement and that claim succeeds, the damage cap would fall with the rest of the contract.
113. See CAL. BUS. & PROF. CODE §§ 20010, 20040; CONN. GEN. STAT. §§ 42-133f, 42-133g; 1987 ILL. LAWS Ch. 815 §§ 705/41, 705/26; IND. CODE ANN. §§ 23-2-2.7-1, 23-2-2.5-28; IOWA CODE §§523H.4, 523H.14; MD. ANN. BUS. OCC. & PROF. §§14-226, 14-227; MICH. COMP. LAWS §§445.1527(b), 445.1531; MINN. R. §§ 80C.21, 80C.17 (Minnesota); R.I. GEN. LAWS 19-28.1-15, 19-28.1-21; S.D. CODIFIED LAWS §§ 37-5A-86, 37-5A-83, 37-5A-85; WIS. STAT. ANN. §§ 135.025, 135.06. See also Matter of the Arbitration Between Brown's Tractor and Fiat Tractor North American Operations, Ford New Holland Inc., Bus. Franchise Guide(CCH) ¶ 11,539 (AAA 1998), in which an arbitrator refused to enforce damage limitations in dealer agreements because they violated state laws protecting agricultural equipment dealers.
114. 107 F.3d 493, Bus. Franchise Guide (CCH) ¶ 11,117 (7th Cir. 1997).
115. CIV No 87-2790, 1988 WL 66194, Bus. Franchise Guide (CCH) ¶ 9,214 (D.D.C. June 17, 1988). But see Weaver v. American Oil Co., 276 N.E.2d 144 (Ind. 1971) (lease agreement between oil company and uneducated gas station owner was unconscionable and unenforceable when it absolved the oil company from the negligence of its employees and required the station owner to indemnify the company for its negligence).
116. As Cognitest and Beitzell illustrate, franchisors may increase their chances of enforcing a damage cap by having the provision track the language of UCC § 2-719(3), which expressly contemplates the exclusion of consequential damages:

Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

Furthermore, even if the UCC does not directly apply to a particular dispute, courts may look to the UCC by way of analogy in determining whether to enforce a damage liquidation provision. See, e.g., Stanley A. Klopp, Inc. v. John Deere Co., 510 F. Supp. 807, 809 (E.D. Pa. 1981) ("even if the UCC does not apply by its own terms, it represents a policy statement by the state legislature concerning good faith, as applicable to a franchise agreement as to a conventional article 2 contract for sale of goods"), aff'd, 676 F.2d 688 (3d Cir. 1982).

117. 510 F. Supp. 807 (E.D. Pa. 1981).
118. 494 F. Supp. 318 (N.D. Okla. 1980).
119. See Graham Oil Co. v. Arco Products Co., 43 F.3d 1244, Bus. Franchise Guide (CCH) ¶ 10,852 (9th Cir.), cert. denied, 516 U.S. 907 (1995). See also Hooters of America v. Phillips, 39 F. Supp.2d 582 (D.S.C. 1998) (employee in discrimination case cannot be forced to submit to arbitration where the arbitration would contravene federal and state remedial measures); Loos & Dilworth v. Quaker State Oil Refining Co., 500 A.2d 1155 (Pa. Super. Ct. 1985) (the trial court had given a jury instruction that a damage limitation would be of not effect if the jury found that a franchise relationship existed. The appellate court did not consider whether this was correct, noting that the Pennsylvania courts had never considered the issue and that the parties had failed to raise it at trial).
120. See, e.g., Harold Brown, FRANCHISING REALITIES AND REMEDIES § 8.06 [3] (1998) (citing Standard Register Co. v. Bolton Emerson Inc., 649 N.E.2d 791 (Mass. App. Ct. 1995)) (manufacturer was not immune from damage claim despite express contract provision, when manufacturer misrepresented its ability to deliver the product). See also VMark Software, Inc. v. EMC Corp., 642 N.E.2d 587 (Mass. 1994) (damage limitation clause does not prohibit the collection of damages stemming from misrepresentation tort in the software licensing context).
121. 695 F. Supp. 58, Bus. Franchise Guide (CCH) ¶9,202 (D. Mass. 1988).
122. See Klopp, 510 F. Supp. at 817.
123. See Bowles Distrib. Co. v. Pabst Brewing Co., 317 S.E.2d 684 (N.C. 1984) (upholding a limitation within a distributorship agreement on lost profit damages, but ruling that diminution in value damages would be available).
124. See Oil Express Nat'l, Inc. v. D'Allesandro, No. 96 C 1528, 1998 WL 341809) (N.D. Ill. June 15, 1998).
125. See Schweber Elecs v. National Semiconductor Corp., 850 P.2d 119 (Ariz. Ct. App. 1992).
126. 489 U.S. 468, Bus. Franchise Guide (CCH) ¶ 9,421 (1989).
127. 489 U.S. at 478 (quotations and citations omitted).
128. Id.
129. Of course, jury trial waivers are subject to constitutional constraints, which might put them in a different category. As noted above, however, a principal feature of arbitration agreements is that they take away the right to trial by jury, but courts rarely tarry over the constitutional implications when enforcing arbitration.
130. L&R Realty, 715 A.2d at 753.
131. But see note 4 supra, concerning recent decisions on employment agreement arbitration clauses.