July 11, 2023
By: Thomas O’Connell
Citation:
Ground Guys SPV, LLC v. Shadow Environment, LLC, Not Reported in Fed. Supp., 2023 WL 4872906 (W.D. Tex. 2023)
Executive Summary:
In this unpublished decision, Magistrate Judge Jeffrey C. Manske of the United States District Court for the Western District of Texas recommended granting the plaintiff’s motion to remand the case back to Texas state court under 28 U.S.C. § 1447(c). The dispute centered on whether a franchise agreement’s forum selection clause, which expressly waived removal rights, precluded defendants from removing the case to federal court. The court found that the forum selection clause in the Franchise Agreement was enforceable under federal and Texas law. Thus, it dismissed the defendants’ arguments that the clause was invalidated by an addendum referencing California law. The court relied on precedent, including Waters v. Browning-Ferris Indus., Inc., 252 F.3d 796 (5th Cir. 2001). The court concluded that the removal was improper and recommended remand to the 414th Judicial District Court in McLennan County, Texas.
Relevant Background:
The Ground Guys SPV, LLC (“Plaintiff”) is a franchisor specializing in lawncare and landscaping services, with its principal place of business in Waco, Texas. Shadow Environment, LLC (“Defendant”), a California corporation, and its guarantor, Andrew Choi, entered into a franchise agreement with the plaintiff on November 16, 2021. The agreement included a forum selection clause specifying that disputes arising under the agreement must be litigated in McLennan County, Texas, and expressly waived the right to remove cases to federal court under Section 14.H of the Franchise Agreement.
On November 15, 2022, the plaintiff initiated a lawsuit in the 414th Judicial District Court of McLennan County, Texas, alleging breach of the franchise agreement and seeking monetary damages. Defendants removed the case to federal court, citing diversity jurisdiction under 28 U.S.C. § 1332 and arguing that the forum selection clause was rendered invalid by an addendum to the franchise agreement referencing California law. The plaintiff filed a motion to remand, asserting that removal violated the forum selection clause.
Decision:
Judge Manske recommended granting the plaintiff’s motion to remand, finding the removal improper for several reasons:
- The court held that the forum selection clause explicitly waived both parties’ rights to remove disputes to federal court. The language of the clause unambiguously precluded removal, consistent with Texas contract law principles that enforce parties’ intent as expressed in their agreements. This is in line with the Fifth Circuit’s ruling in Waters v. Browning-Ferris Indus., Inc., 252 F.3d 796 (5th Cir. 2001), which held that a waiver of the right to remove need not be explicit if the forum selection clause clearly gives one party the exclusive right to select the forum.
- The defendants argued that the addendum’s reference to California law invalidated the forum selection clause. The court rejected this, noting that the addendum only applied to specific provisions relating to termination, transfer, or non-renewal of the franchise—none of which were at issue in this case. Furthermore, the court found no conflict between Texas and California law that would negate the enforceability of the clause. The court relied on Dynamic CRM Recruiting Sols., L.L.C. v. UMA Educ., Inc., 31 F.4th 914 (5th Cir. 2022), which held that federal law governs the enforceability of forum selection clauses in diversity cases, while interpretation is governed by the forum state’s law.
- The court emphasized that under Fifth Circuit precedent, a forum selection clause waiving removal rights does not need to use explicit language if it gives one party the exclusive right to select the forum. The defendants’ reliance on the addendum was misplaced as the addendum was limited in scope and did not apply to the current dispute. The forum selection clause in Section 14.H of the Franchise Agreement explicitly precluded removal.
The court recommended remanding the case to the 414th Judicial District Court in McLennan County, Texas, as the defendants’ removal was procedurally improper under 28 U.S.C. § 1447(c).
Looking Forward:
This decision underscores critical lessons for franchisors and franchisees in both Texas and California:
- Franchisors must ensure that forum selection clauses clearly state the chosen jurisdiction and waive removal rights where necessary. Clear and precise language reduces jurisdictional disputes and protects contractual intent. In this case, the franchisor could have avoided the dispute by adding explicit language that prioritized the forum selection clause over addenda referencing state-specific laws. Franchisors should also ensure consistency between core agreements and addenda. Addenda addressing state-specific provisions must be limited in scope and should not conflict with overarching terms like forum selection clauses.
- For franchisees, the case underscores the importance of reviewing jurisdictional clauses thoroughly before signing agreements. Jurisdictional provisions can significantly impact dispute resolution. Consulting legal counsel is essential to understand the enforceability of these clauses under state laws.
On the whole, this decision also serves as a reminder that courts prioritize contractual intent and state law compliance. Therefore, franchisors should proactively address potential vulnerabilities in agreements to reduce the likelihood of unfavorable litigation outcomes while maintaining compliance with applicable laws.