An out-of-state franchisor with no Texas stores, no Texas leases, and no Texas employees can still find itself named in a Texas lawsuit because a franchisee’s storefront carries its brand. Plaintiffs make the argument regularly, and it is usually based on the visible presence of franchised locations. Under current Texas and federal law, “visible presence” will not alone establish general jurisdiction. Franchisors should still understand why, because the answer turns on how they actually structure their relationship with franchisees in the forum.
General jurisdiction now means “at home”
The Texas long-arm statute reaches as far as federal due process allows, so in practice the constitutional analysis is the only one that matters. The Texas Supreme Court said as much in State v. Volkswagen Aktiengesellschaft: federal due process requirements shape the contours of Texas courts’ jurisdictional reach. A plaintiff who pleads the long-arm statute and stops there has not engaged with the question.
Since the United States Supreme Court’s decisions in Goodyear Dunlop Tires v. Brown and Daimler AG v. Bauman, general jurisdiction over a corporation exists where the corporation is “at home,” and the paradigm forums are its place of incorporation and its principal place of business. The Fifth Circuit in Monkton Insurance Services v. Ritter described it as incredibly difficult to establish general jurisdiction anywhere else. The Texas Supreme Court adopted the same framework in Searcy v. Parex Resources: courts do not have general jurisdiction over corporate defendants that are neither incorporated in the forum nor headquartered there, absent some relatively substantial contacts with it.
How substantial is substantial? In BNSF Railway v. Tyrrell, more than 2,000 miles of track, over 2,000 employees, and a facility in the forum did not make a railroad at home there. A recent Western District of Texas decision, Stambro v. Vanderhall Motor Works, held that a major automaker with thousands of Texas employees, hundreds of Texas dealers, billions in Texas supplier spending, and a financial subsidiary headquartered in Texas was still not at home in Texas. Against that yardstick, a franchisor’s brand appearing on independently owned stores is not close.
Why the franchise relationship is not a substitute
At least three Texas courts of appeals have addressed the franchise question directly. In Kumon North America v. Nguyen, the Fourteenth Court of Appeals reversed a trial court’s finding of jurisdiction over a franchisor. In Hilton Franchise Holding v. Peguero, the Fort Worth Court of Appeals reached a similar result. And recently, the Fourteenth Court of Appeals similarly discussed in Hilton Franchise Holding, LLC v. Augustine that the mere existence of a franchisor-franchisee relationship does not establish jurisdiction over the franchisor, even when there are a certain number of franchise locations in that forum.
The reason is a rule that predates the franchise cases. The contacts that count are the defendant’s own, and not those of the franchisee, plaintiff, or some other party. Under Walden v. Fiore and Burger King v. Rudzewicz, conduct by plaintiffs or third parties that creates a connection between the defendant and the forum is disregarded. A franchisee is a third party. Its decision to open a store in Houston, sign a lease in Houston, and sell to Houston customers is the franchisee’s contact with Texas, not the franchisor’s.
The lease-assignment argument, and what it depends on
Plaintiffs who understand the at-home standard have looked for a contact that belongs to the franchisor itself, and at times will point to franchise agreements to establish such a contact. Of course, franchise agreements can be written in a manner that permits more involvement on behalf of a franchisor than may occur in practice, so at times, franchise agreements become the main focus in a jurisdictional dispute regarding a franchisor’s contacts with the forum state.
In general, courts should review what contacts the franchisor actually has with the forum state, as opposed to what contacts could arise if contractual rights are exercised. For example, a contractual right to take an assignment of a lease is not the same as holding one. If the franchisor has never taken over a Texas lease, is not party to any Texas lease, and has not acted as prime lessee in Texas, the right is unexercised and the contact is hypothetical. Franchisors defending these motions should be prepared to prove the negative in discovery or in court, because plaintiffs will use the franchise agreement to imply the opposite.
Additionally, even an exercised right would face the Texas Supreme Court’s holding in PHC-Minden v. Kimberly-Clark that contracting with Texas residents does not by itself subject an out-of-state company to general jurisdiction. Holding a lease in the forum is a contact, but general jurisdiction requires the defendant to be at home, and one lease or a handful of leases is a long way from that.
What franchisors should take from this
The doctrine is favorable, but it rewards franchisors whose conduct matches their structure. One point matters most in practice.
Keep the franchisor out of franchisee leases in forums where it does not otherwise operate. The prime-lessee and collateral-assignment tools in a franchise agreement have real business value, but every exercise of them in a state creates a contact that the franchisor, not the franchisee, owns. While the “at-home” standard is high, a franchisor looking to avoid being haled into foreign courts should be cognizant of creating additional contacts with such a forum.
Specific jurisdiction is a separate inquiry, and a franchisor that participated in the transaction giving rise to the claim faces a different analysis. For a franchisor with no role in the underlying dispute, however, the question is general jurisdiction, and the standard is at home.
For questions about defending an out-of-state franchisor or other nonresident defendant in Texas, contact Marcus Eason.