Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

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FAULKENBERG v. CB TAX FRANCHISE SYSTEMS (March 29, 2011)

In late 2007, Jon Faulkenberg and Byron LeMaster inquired about owning a CB Tax franchise. The company, headquartered in Texas, sent them an offering circular that summarized the franchise agreement. In particular, the circular disclosed that the agreement required all disputes to be arbitrated in Texas and required all litigation to be brought in Texas. The parties ultimately entered into a franchise agreement, although there is some dispute about how and where the parties executed the agreement. Faulkenberg and LeMaster eventually opened five franchises. Four of them were located in Missouri and one in Illinois. CB tax asserts that the agreement was intended to cover only Missouri franchises. Within a matter of months, Faulkenberg and LeMaster closed all the franchises and filed suit against CB Tax in Illinois state court. They alleged violations of the Illinois Franchise Disclosure Act as well as common law fraud. CB Tax removed the case to federal court and moved to dismiss, citing both the arbitration clause and the forum selection clause. Judge Stiehl (S.D. Ill.) dismissed the complaint on the forum selection clause grounds. Faulkenberg and LeMaster appeal.

In their opinion, Circuit Judges Evans and Sykes and District Judge Der-Yeghiayan affirmed. The Court noted that the Illinois Franchise Act nullifies forum selection clauses in franchise agreements. The district court was not clear in its rationale for not applying the Act. The Court presumed that the court rejected plaintiffs' argument that the franchise was located in Illinois. But that was error. The court was obliged to accept plaintiffs' version of the facts and plaintiffs alleged that one of the franchises was located in Illinois. They also submitted evidence in support of the allegation in the form of two e-mails and a reference on CB Tax's website. Although the Court concluded that the lower court was wrong to dismiss pursuant to the forum selection clause, it nevertheless concluded that there was an alternative ground for dismissal -- the arbitration clause. Before addressing the substance of the argument, the Court disposed of several preliminary matters. First, the Illinois Franchise Act specifically permits parties to agree to arbitrate outside of Illinois. Second, CB Tax did not waive its right to arbitration when it filed its motion to dismiss. Third, a Rule 12(b)(3) motion is the proper vehicle, rather than a motion to compel arbitration, when the arbitration locale is outside the district. So, if the parties agreed to arbitrate in Texas, the case was properly dismissed for improper venue. The court concluded that the evidence strongly supported an agreement to arbitrate. The circular discussed the arbitration clause. The franchise agreements contained the arbitration clause in plain terms. Faulkenberg and LeMaster received the circular and signed the franchise agreement. They also signed an acknowledgment stating that they had read and understood the agreement. The Court rejected their arguments that they failed to read or understand the franchise agreement and that they did not know they were signing a franchise agreement.