Federal Court Analyzes Venue Statutes and Orders Transfer of Suit Against Franchisee
In Honest Abe Roofing Franchise, Inc. v. Lesjon Holdings, LLC, the District Court for the Southern District of Indiana ruled on a motion to dismiss for improper venue under Federal Rule 12(b)(3) and stressed the defendant’s convenience was a key consideration in its ruling.
The plaintiff, Honest Abe Roofing Franchise, Inc. (“Honest Abe”), ran a roofing franchise business. In early 2019, married couple Leslie and Johnathan Keim formed a company, Lesjon Holdings, LLC, and signed a franchise agreement with Honest Abe. The Keims also personally guaranteed the financial performance of the franchise. Both agreements contained forum selection clauses: Illinois for the franchise agreement and the Indiana for the guarantee.
Honest Abe alleged that Lesjon Holdings defaulted on the franchisee agreement for various reasons in July 2022. Honest Abe terminated the franchise agreement and sued Lesjon Holdings and the Keims as the guarantors in Indiana state court for breaches of the agreements. The defendants removed to the US District Court for the Southern District of Indiana and moved to dismiss or transfer for improper venue.
The Defendants argued that the franchise agreement’s forum selection clause controlled because the Illinois provision was more specific as opposed to the allegedly more general Indiana provision in the guaranty agreement. Honest Abe argued the inverse, contending that the guaranty agreement was a separate contract from the franchise agreement and, thus, one forum selection clause did not control the other.
The Court noted that the clauses had two things in common: they both appeared contradictory while also appearing mandatory. However, only one clause could be enforced. In determining which forum selection clause governed, the Court engaged in several forms of analysis:
- Which contractual terms were primary, and which were secondary;
- Whether the interest of justice factors under 28 U.S.C. § 1404 weighed in favor of transfer;
- Whether the factors of 28 U.S.C. § 1406 weighed in favor of transfer; and
- Whether the historical predicate of the suit bore any significance.
The Court determined that the claims under the franchise agreement were primary and those under the guaranty agreement were secondary. Because the guaranty agreement specifically subjected the Keims to personal liability for Lesjon Holdings’ performance under the franchise agreement, the Court reasoned that a breach of the guaranty agreement depended upon a breach of the franchise agreement. Thus, the franchise agreement’s forum selection clause controlled.
However, because 28 U.S.C. § 1404 permits transfer even when the suit’s current venue is proper, the Court then analyzed whether the public interest factors nonetheless required a change in venue. Specifically, the Court looked to:
- The administrative difficulties flowing from court congestion;
- The local interest in having localized controversies decided at home; and
- The interest in having the trial of a diversity case in a forum that is at home within the law.
The Court observed that the district court for the Southern District of Indiana had one of the busiest dockets in the country and the Central District of Illinois one of the slowest. Moreover, the case centered on a franchise agreement subject to Illinois law involving an Illinois based franchisor. The interest of justice factors weighed in favor of an Illinois venue.
Next, the Court examined whether the Southern District of Indiana itself was a proper forum separate and apart from the issue of transfer. Under 28 U.S.C. § 1406, venue is proper in:
- a judicial district in which any defendant resides, if all defendants are residents of the State in which the district is located;
- a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated; or
- if there is no district in which an action may otherwise be brought as provided in this section, any judicial district in which any defendant is subject to the court’s personal jurisdiction with respect to such action.
Neither the Keims nor Lesjon Holdings resided in Indiana, and there was at least one other district in which the action could be brought—the Central District of Illinois. Therefore, the Court focused exclusively on the second factor and simply concluded, the Southern District of Indiana was not a proper venue because the case again centered on conduct performed in Illinois and implicated Illinois law.
The Court ultimately granted the motion to transfer. The Court emphasized that venue rules are designed to protect the defendant’s convenience, not the plaintiff’s. Here, the defendants include an Illinois franchisee that operated exclusively in Illinois under the Illinois Franchise Disclosure Act. Thus, it was in the interest of justice that the case be transferred to a federal court in Illinois.
