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Jon Faulkenberg, Byron Lemaster v. Cb Taxfranchisesystems

March 29, 2011

JON FAULKENBERG, BYRON LEMASTER, AND JF MARKETING, LLC, PLAINTIFFS-APPELLANTS,
v.
CB TAX FRANCHISE SYSTEMS, LP, COLBERT BALL TAX SERVICE, INC., AL COLBERT, AND JAJA BALL, DEFENDANTS-APPELLEES.



Appeal from the United States District Court for the Southern District of Illinois. No. 08-cv-521-William D. Stiehl, Judge.

The opinion of the court was delivered by: Sykes, Circuit Judge.

ARGUED NOVEMBER 9, 2009

Before EVANS and SYKES, Circuit Judges, and DERYEGHIAYAN, District Judge.*fn1

Jon Faulkenberg and Byron LeMaster, residents of Missouri, contracted with CB Tax Franchise Systems, LP, a company headquartered in Texas, to operate five tax-preparation franchises in and around St. Louis. The franchise agreement contained two clauses that are common in franchising and central to this case: an arbitration clause and a forum-selection clause. Under the arbitration provision, CB Tax franchisees must submit all disputes with the company to arbitration in Texas before filing suit. If arbitration is unsuccessful, the forum-selection clause permits franchisees to sue-but only in Texas. How then did this suit end up in Illinois?

According to Faulkenberg and LeMaster, one of their CB Tax franchises was located in Alton, Illinois, near the Illinois-Missouri border and adjacent to St. Louis. When their franchises failed, they sued CB Tax in state court in Madison County, Illinois, alleging common-law fraud and violations of the Illinois Franchise Disclosure Act of 1987, 815 ILL. COMP. STAT. 705/1 et seq. The Illinois Franchise Act voids all forum-selection clauses in franchise agreements, which helps explain the plaintiffs' forum-selection decision. Id. 705/4. Faulkenberg and LeMaster claimed they were fraudulently induced to purchase the CB Tax franchises and also that CB Tax failed to register the Alton franchise with Illinois regulatory authorities as required under the Act. CB Tax removed the suit to federal court and then moved to dismiss for improper venue based on both the forum-selection and arbitration clauses in the franchise agreement.

The district court granted the motion based on the forum-selection clause. The court first held that the Franchise Act did not apply because the parties had no connection to Illinois; because the Act did not apply, the forum-selection clause was enforceable and venue in Illinois was improper. The factual premise for the first of these rulings is mistaken. At the motion-to-dismiss stage, the court was required to accept the plaintiffs' allegation that one of the franchises they purchased was located in Alton, Illinois. Moreover, the uncontested evidence the parties submitted on the Rule 12(b)(3) motion bears this out as a matter of fact.

Still, the case was properly dismissed for improper venue. Although the Franchise Act voids forum-selection clauses in franchise agreements, it expressly permits out-of-state arbitration, 815 ILL. COMP. STAT. 705/4, and the parties' franchise agreement contained a broad arbitration clause requiring all disputes to be submitted to arbitration in Texas. A court may dismiss for improper venue based on either a forum-selection clause or an arbitration provision; both are properly asserted as objections to venue. The Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1 et seq., strongly favors arbitration when the parties have agreed to it, as they clearly did here. We therefore affirm.

I. Background

Faulkenberg and LeMaster became interested in operating a CB Tax franchise in September 2007. In response to their inquiry, CB Tax sent them a Uniform Franchise Offering Circular and a copy of the CB Tax franchise agreement. The circular stated that all CB Tax franchises are governed by the standard franchise agreement; this document summarized the franchise agreement in plain language. Under a section entitled "Renewal, Termination, Transfer and Dispute Resolution," the circular says: "All claims are subject to arbitration in Houston, Texas," and "[a]ll proceedings shall be brought" in Texas. Faulkenberg signed a receipt acknowledging that he received the circular and the accompanying standard franchise agreement. The receipt instructs prospective franchisees to "[r]ead this offering circular and all agreements carefully," but Faulkenberg admits that he did not do so. He claims not to have noticed any reference to an arbitration provision or a forum-selection clause in the circular. His business partner LeMaster neither read nor signed the circular.

In late October 2007, Faulkenberg emailed CB Tax to request a reduction in the franchise fee. A CB Tax employee emailed back with a "revised annual fee agreement" reflecting a lower fee. The employee attached a sample CB Tax business plan to the email, telling Faulkenberg that it "will be a useful plan for your future CB franchises." The cover page of the business plan says, "[CB Tax] Business Plan, Union, New Jersey, Franchise Owner: Walter McDowell." The plan provided an overview of the tax-preparation industry and a howto guide for the management and operation of a CB Tax franchise. The CB Tax employee also attached a promissory note to the email. On October 31, 2007, Faulkenberg and LeMaster wired $15,000 to CB Tax as consideration for their purchase of five CB Tax franchises.

In November 2007 the parties executed the franchise agreement, although they dispute both the precise date and the manner of execution. CB Tax maintains that Faulkenberg and LeMaster signed the agreement in Texas on November 8, 2007. Faulkenberg and LeMaster contend they were not in Texas on that date. According to their version of events, they attended a franchise training session at CB Tax offices in Houston on November 17 and at that time signed several sheets of paper but were not given the entire franchise agreement.

The franchise agreement itself bears out CB Tax's contention. It is dated November 8, 2007, and signed by both Faulkenberg and LeMaster, as well as a representative of CB Tax. More specifically, on Page A-1 of the agreement, Faulkenberg and LeMaster filled in their names and the November 8, 2007 date. This page plainly states that by signing the agreement, the franchisees attest that they understood they were signing a legally binding franchise contract. Faulkenberg and LeMaster also filled in their names and the November 8 date on page A-32 of the agreement. That page states (among other things) that "[e]ach party affirms to the other that it has had the opportunity to consult and discuss the provisions of this Agreement (including the exhibits and attachments hereto)" with independent legal counsel. The signature page of the agreement is signed by both Faulkenberg and LeMaster and a representative of CB Tax. In addition, Faulkenberg and LeMaster signed various exhibits to the franchise agreement, including a "Controlling Principals Guaranty," a "Certificate of Franchisee," and a "Release of Claims." These documents refer explicitly to the franchise agreement and the franchisees' rights and obligations under it.

The franchise agreement contains the following broad arbitration provision: "[A]ny claim, controversy or dispute arising out of or relating to the franchise, . . . including, but not limited to, any claim . . . concerning the entry into, the performance under or the termination of the agreement . . . shall . . . be referred to arbitration" in Houston, Texas. The forum-selection clause provides that any litigation "against any party to this Agreement arising out of this Agreement or the transactions contemplated thereby shall be brought in the United States District Court for the Southern District of Texas or in any court of appropriate jurisdiction in Harris County, Texas."

The parties dispute whether their agreement included a franchise to be located in Alton, Illinois. Faulkenberg and LeMaster submitted two emails suggesting that everyone understood that one of the five franchises under discussion would be in Alton. The first email specifically refers to an address in Alton: "2835 Homer Adams Pkwy, Alton, IL 62002." The second mentions the zip codes of the five proposed franchise locations and includes the zip code applicable to Alton. A reply from a representative of CB Tax indicates that these locations were "duly noted." In an affidavit, however, this employee said he assumed all of the locations were in Missouri. Faulkenberg and LeMaster also claim that a representative of CB Tax personally inspected the Alton location and remarked that it was better than the other proposed locations in Missouri. ...


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