Beer Halls and Forum Selection Clauses

Homer Simpson once described alcohol as the “cause of, and solution to, all of life’s problems.” The same can be said for forum selection clauses. In the hands of the cognoscenti, these provisions can operate as magical elixirs that completely insulate a litigant from liability. In the hands of those unfamiliar with their intricacies, these provisions can needlessly extend the life of a lawsuit and generate costly appeals. Alcohol and forum selection clauses, as it turns out, have more in common than one might think.

A recent decision by a federal district court in Nevada involving a famous German beer hall serves to reinforce the connection between alcohol and forum selection clauses. In this post, I first describe the facts of the case and recount its procedural history. I then critique the court’s analysis of the forum selection clause as it relates to (1) subject matter jurisdiction, (2) personal jurisdiction, and (3) the defendant’s motion to transfer. The post concludes with a call to TLB readers to lift a glass to forum selection clauses in honor of the New Year.

Hofbräuhaus of America, LLC v. Oak Tree Management Services, Inc.

The world-famous Hofbräuhaus brewery and beer hall in Munich, Germany, is owned by Staatliches Hofbräuhaus in Munchen (“SHM”). SHM entered into an agreement with Hofbräuhaus of America, LLC (“Hofbräuhaus”), a Nevada limited liability company with its principal place of business in Nevada, that gave Hofbräuhaus the exclusive rights to franchise the Hofbräu München brand, including its related trade dress and marks, in North America. In December 2014, Hofbräuhaus entered into a franchise agreement with Oak Tree Management Services, Inc. (“Oak Tree”), a Missouri corporation with offices in Illinois, to open a Hofbräuhaus-branded restaurant and beer hall in Belleville, Illinois. After years of delays, the Belleville beer hall finally opened in early 2018. The beer hall in Belleville is a replica of the Hofbräuhaus in Munich, Germany, and uses the Hofbräuhaus trade name, mark, logo, and branding throughout the building.

By mid-2019, Oak Tree had fallen behind on its payments to its lenders, so a Missouri court appointed a receiver to manage the affairs of the beer hall. Oak Tree also fell out of compliance with its obligations under the franchise agreement. Among other violations, it started serving domestic beer, including non-Hofbräuhaus products, and installed an arcade and pool tables on the premises. Hofbräuhaus terminated the franchise agreement and sued Oak Tree in the United States District Court for the District of Nevada (Judge Anne A. Traum) for (1) trademark and trade dress infringement under federal law, and (2) copyright infringement under federal law, and (3) declaratory relief under Nevada state law.

Over the course of their relationship, Hofbräuhaus and Oak Tree had entered into three separate franchise agreements. The first agreement was concluded in 2014. The second agreement, which was concluded in February 2017, contained an Illinois choice-of-law clause, an exclusive Illinois forum selection clause, and an acknowledgement that it was subject to the Illinois Franchise Disclosure Act (“IDFA”). The third and final agreement, which was concluded in January 2018, contained a Nevada choice-of-law clause and a Nevada forum selection clause. It is not clear whether the Nevada forum selection clause in this third agreement is exclusive or non-exclusive.

The district court identifies the 2018 agreement – with the Nevada choice-of-law and forum selection clause – as the “relevant, albeit expired” agreement. As previously discussed at TLB, the mere fact that an agreement has expired does not mean that the dispute resolution provisions contained within that agreement cease to have any effect. Instead, most courts have held that choice-of-law clauses and forum selection clauses survive the termination of the agreement. The district court did not address this issue but its analysis suggests that it viewed the forum selection clause as having effect after the agreement was terminated. With this insight in mind, let us now turn to the legal issues relating to the forum selection clause.

Subject Matter Jurisdiction

The defendant (Oak Tree) first argued that the court lacked subject-matter jurisdiction to hear the plaintiff’s claims. This district court correctly rejected this argument. The court pointed out that it had subject matter jurisdiction to hear the plaintiff’s federal claims for trademark and trade dress infringement under 28 U.S.C. § 1331 and for copyright infringement under 28 U.S.C. § 1338, and to hear the plaintiff’s state claims under 28 U.S.C. § 1367(a). The court clearly had subject-matter jurisdiction given the claims asserted. It is interesting, however, to look at the arguments advanced by Oak Tree.

Oak Tree urged the court to “consider the Franchise Agreement, find that the Nevada choice of law provision in the Franchise Agreement is void under the [Illinois Franchise Disclosure Act], and thus dismiss the fourth claim for declaratory relief” for lack of subject-matter jurisdiction. On its face, this argument makes no sense. A dispute relating to the validity of a choice-of-law clause is irrelevant to whether a federal court has subject matter jurisdiction.

It is possible that the reference to a “Nevada choice of law clause” was intended to be a reference to a “Nevada forum selection clause.” This reading derives support from the fact that the court quotes a section of the Illinois Franchise Disclosure Act (IFDA) which states that “any provision in a franchise agreement that designates jurisdiction or venue in a forum outside of this State is void.” Under this reading, Oak Tree seems to have been arguing that the validity or invalidity of a forum selection clause can affect the subject matter jurisdiction of a federal court. This argument is likewise nonsensical. A forum selection clause cannot confer subject matter jurisdiction upon a federal court or take it away. The power to grant or withhold such jurisdiction lies exclusively with Congress.

Personal Jurisdiction

The district court’s opinion is twenty pages long. It devotes eight of those pages to the question of whether Oak Tree is subject to personal jurisdiction in Nevada under the classic minimum contacts test. It first analyzes the question of whether Oak Tree “purposefully directed” its activities at Nevada. It then considers whether Hofbräuhaus’s claims “arose out of” Oak Tree’s Nevada-related activities. Finally, it considers whether it would be unreasonable for Nevada to assert personal jurisdiction over Oak Tree. At the conclusion of this lengthy analysis, the court concluded that it was proper for it to assert personal jurisdiction over Oak Tree.

All of this analysis is unnecessary. As discussed above, the 2018 franchise agreement executed by the parties contained a Nevada forum selection clause. When Oak Tree signed that agreement, it consented to personal jurisdiction in Nevada for at least some subset of claims relating to the contract. Since the court does not quote the exact language of the clause, there is no way to know whether it is broad enough to cover each of the claims asserted. As a rule, however, the Ninth Circuit tends to take an expansive view of these clauses, which means that it is very likely that the defendant was subject to personal jurisdiction in Nevada for all of the claims asserted by the plaintiff. Had the district court recognized this fact, its eight-page minimum-contacts analysis could have been replaced by a single page noting the existence of personal jurisdiction by express consent.

Transfer

The district court’s opinion does not specify whether the Nevada forum selection clause is exclusive or non-exclusive. This is a problem because the legal framework for determining whether to transfer a case under an exclusive forum selection clause is different from the one used to determine whether to transfer under a non-exclusive clause.

If a forum selection clause is exclusive and is otherwise contractually valid, the U.S. Supreme Court has held that the clause should be enforced absent some “extraordinary circumstances unrelated to the convenience of the parties.” If a forum selection clause is non-exclusive, then the district court has considerable discretion as to whether to grant the transfer motion. The court must, among other things, weigh private- and public-interest factors to decide whether transfer to the chosen court furthers the interests of justice.

If the forum selection clause in the 2018 franchise agreement was exclusive, then the district court arguably erred in granting Oak Tree’s motion to transfer the case to Illinois. Since there do not appear to be any “extraordinary circumstances unrelated to the convenience of the parties” presented on these facts, the case should have stayed in the court named in the clause (Nevada). If the forum selection clause was non-exclusive, by contrast, then the district court’s decision to transfer the case is entirely defensible. The beer hall was located in Illinois, any consumer confusion caused by the defendant’s infringing conduct was occurring in Illinois, and any injunctive relief (if granted) would need to be monitored in Illinois. A non-exclusive forum selection clause selecting Nevada, standing alone, would not be enough to deny a transfer to Illinois in light of these facts.

Since the district court never specified whether the clause was exclusive or non-exclusive, alas, the reader has no way of evaluating the soundness of its decision to transfer.

Conclusion

In honor of the New Year, let us all raise a glass and resolve to learn more about the complex, frustrating, and occasionally helpful contract provision that is known as the forum selection clause. There is no better place to begin one’s journey of discovery than the Topic page and the Primer page devoted to this topic on the TLB website.