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Allen v. World Inspection Network International

December 5, 2006


On appeal from the Superior Court of New Jersey, Chancery Division, Camden County, C-161-05.

The opinion of the court was delivered by: S.L. Reisner, J.A.D



Argued October 30, 2006

Before Judges Lintner,*fn1 S.L. Reisner and Seltzer.

Defendant, World Inspection Network International, Inc. (WIN), appeals from a trial court order enjoining WIN from proceeding with arbitration of its dispute with plaintiffs, Michael and James Allen, in the State of Washington and requiring instead that any arbitration must take place in New Jersey. We conclude that the requirement to arbitrate in Washington is an integral part of the arbitration clause in the parties' franchise agreement and therefore falls within the ambit of the Federal Arbitration Act, 9 U.S.C.A. §§ 1 to 16. Under Supremacy Clause principles, the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1 to -29, cannot preclude enforcement of this forum selection provision. We also conclude that the trial judge made insufficient factual findings to justify voiding the forum selection provision under general principles of state contract law, the only relevant exception to enforceability under the Federal Act. Accordingly, we reverse and remand for further proceedings.


We begin by briefly reviewing the procedural and factual history.

In 1997, plaintiffs entered into a written agreement with defendant under which plaintiffs obtained a franchise to operate a home inspection service using the World Inspection Network name. Plaintiffs entered into an agreement for additional franchises in 2000. Both versions of the agreement required that disputes arising under the agreement be resolved by arbitration conducted in the State of Washington.*fn2

After the parties had a series of disputes, plaintiffs' counsel served defendant with a letter dated January 31, 2005, giving notice that plaintiffs were terminating the franchises. In response, defendant filed a demand for arbitration to be conducted in Washington. Plaintiffs, in turn, filed a verified complaint and order to show cause in the Chancery Division, General Equity, in New Jersey, seeking to enjoin the Washington State arbitration and seeking instead to compel arbitration in New Jersey. Plaintiffs' complaint also sought rescission of the franchise agreement, an accounting, damages, and counsel fees.

In the General Equity action, plaintiffs claimed that the location-selection aspect of the arbitration clause violated the New Jersey Franchise Practices Act, N.J.S.A. 56:10-7.3(a) (NJFPA), which by its terms prohibits motor vehicle franchise agreements from [specifying] the jurisdictions, venues or tribunals in which disputes arising with respect to the franchise, lease or agreement shall or shall not be submitted for resolution . . . . [N.J.S.A. 56:10-7.3(a)(2).]

The NJFPA also specifically prohibits mandatory arbitration clauses in motor vehicle franchise agreements, N.J.S.A. 56:10-7.3(a)(3), and provides a presumption against enforcement of such clauses:

For the purposes of this section, it shall be presumed that a motor vehicle franchisee has been required to agree to a term or condition in violation of this section as a condition of the offer, grant or renewal of a franchise or of any lease or agreement ancillary or collateral to a franchise, if the motor vehicle franchisee, at the time of the offer, grant or renewal of the franchise, lease or agreement is not offered the option of an identical franchise, lease or agreement without the term or condition proscribed by this section. [N.J.S.A. 56:10-7.3(b).]

As construed by the Supreme Court, this prohibition extends to all franchise agreements as follows:

[F]orum-selection clauses in franchise agreements are presumptively invalid, and should not be enforced unless the franchisor can satisfy the burden of proving that such a clause was not imposed on the franchisee unfairly on the basis of its superior bargaining position. Evidence that the forum-selection clause was included as part of the standard franchise agreement, without more, is insufficient to overcome the presumption of invalidity. [Kubis & Perszyk Assocs. v. Sun Microsystems, Inc., 146 N.J. 176, 195 (1996).]

Defendant responded that the Federal Arbitration Act (FAA or Federal Act), 9 U.S.C.A. § 2, preempted New Jersey law insofar as State law might preclude a franchisor from requiring a franchisee to arbitrate a dispute in another state. The relevant provision of the FAA requires enforcement of arbitration clauses in commercial contracts, with certain narrow exceptions:

[A] written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, ...

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