A federal district court has denied a motion to dismiss filed by an individual franchisee owner for lack of personal jurisdiction, despite the fact that the individual was not a party to the franchise agreement. In Alamo Intermediate II Holdings v. Birmingham Alamo Movies, the district court held that language in the agreement indicated the individual intended to be bound by its terms. ABA Litigation Section leaders consider this opinion to be well-reasoned but believe that contract drafters should take note.
In January 2022, the plaintiff franchisor Alamo Intermediate Holdings (Alamo) and the defendant franchisee Birmingham Alamo Movies (BAM) entered into a franchise agreement by which BAM agreed to develop an Alamo Drafthouse movie theater venue. Under the terms of the franchise agreement, another defendant, developer Orchestra Partners Development (Orchestra) agreed to serve as the project developer and executed a corporate guaranty agreement. A third defendant, individual Hunter Renfroe, co-owner of BAM and Orchestra, was the “operating principal” and “controlling principal” as defined by the franchise agreement. Although Renfroe signed all documents on behalf of BAM and Orchestra, he did not sign in his individual capacity. The franchise agreement also contained a forum selection clause, whereby the parties agreed to litigate any disputes in “the U.S. District Court for the Western District of Texas, or if such court lacks jurisdiction, the state courts located in Travis County, Texas.”
Development of the franchise venue ultimately failed. Alamo filed a lawsuit in the U.S. District Court for the Western District of Texas, asserting claims for breach of contract against BAM, Orchestra, and Renfroe in his individual capacity. Renfroe filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(2), asserting the district court did not have personal jurisdiction over him in his individual capacity. Specifically, Renfroe argued that the court “lacks personal jurisdiction over him because he is a resident of Alabama, has no contact within the State of Texas to confer personal jurisdiction, and he is not a party to the Franchise Agreement which contains a forum selection clause and waiver of jurisdiction.”
The district court denied the motion, acknowledging that the opening clause and signature page of the franchise agreement state that the agreement is between the plaintiff Alamo and the defendant developer BAM. However, the court determined that Renfroe “demonstrated an intent to be bound individually” under the terms of the agreement. Specifically, the district court noted that Renfroe was both an “operating principal” and “controlling principal,” and noted the agreement provided that the operating principal shall be “individually, jointly and severally, bound by all obligations of Franchisee.” The court further determined that “[t]his demonstrated intent includes the forum selection clause and the waiver of challenge to jurisdiction also contained within the Franchise Agreement.”
Regardless of whether Renfroe was a party, under a “separate principle of law”, the court determined that Renfroe would still be bound by the forum selection clause based on his “admitted negotiation and familiarity with the substance of the franchise agreement, and his obligations under the Franchise Agreement which made it foreseeable that he would be bound by the forum selection clause.” Per the “closely related doctrine,” a non-signatory can be bound to a forum selection clause if the non-signatory is so “closely related to the dispute such that it becomes foreseeable that it will be bound,” or if the non-signatory is so “inextricably intertwined with the signatories that he should be the subject of the forum-selection clause.”
In this instance, the district court determined that based on the undisputed facts, “Renfroe was well informed of the specific terms of the Franchise Agreement, BAM’s obligations pursuant to its terms, and his own obligations under its terms.” As a result, “Renfroe is so inextricably intertwined with the signatories and so intricately involved in the purpose and execution of the Franchise Agreement that he should be held subject to the forum-selection clause.”
While Litigation Section leaders agree with the district court’s decision, “this opinion is likely to suggest to savvy contracts counsel that they should always include provisions extending some of the contract’s provisions to individuals even if they don’t sign personally,” states Brian Esler, Seattle, WA, Co-Chair of the Section’s Business Torts & Unfair Competition Section. From a different perspective, it may be good practice to “insert language into franchise agreements that make it clear that employees, officers, or principals are not party entities,” says John B. Strasburger, Houston, TX, Co-Chair of the Section’s Commercial & Business Litigation Section.
