Faulkenberg v. CB Tax Franchise Systems, LP
637 F.3d 801
| 7th Cir. | 2011Background
- Faulkenberg and LeMaster sought to operate five CB Tax franchises around St. Louis, including one allegedly in Alton, Illinois.
- The franchise agreement includes a broad arbitration clause requiring disputes to be arbitrated in Houston, Texas, and a forum-selection clause tying litigation to Texas courts.
- The Uniform Franchise Offering Circular stated all claims were subject to arbitration in Houston; Faulkenberg signed a receipt but claims not to have read the arbitration or forum clauses.
- Evidence suggested that one franchise location was in Alton, Illinois, and CB Tax’s own materials and actions corroborated discussions of an Illinois site, creating a factual dispute about Illinois ties.
- Illinois Franchise Disclosure Act prohibits forum-selection clauses and permits out-of-state arbitration; the district court dismissed on forum-selection grounds but the court later acknowledged an arbitration-ground basis for dismissal.
- The Seventh Circuit ultimately affirmed dismissal for improper venue, holding the arbitration clause alone justifies venue in Texas and not Illinois.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did the arbitration clause authorize out-of-state arbitration and compel dismissal for improper venue? | Faulkenberg/LeMaster rely on Illinois Act to void forum clause and avoid Texas arbitration. | Arbitration clause requires Texas arbitration, justifying dismissal for improper venue. | Arbitration clause controls; dismissal proper. |
| Does Illinois Franchise Act 705/4 void the forum-selection clause and allow Illinois venue or arbitration elsewhere? | Act voids forum selection in franchise agreements, permitting Illinois venue. | Act allows out-of-state arbitration; forum clause can be overridden by arbitration provision. | Act does not mandate Illinois venue; arbitration provision governs. |
| Was there a genuine contract-formation issue about whether Faulkenberg/LeMaster signed a franchise agreement and agreed to arbitrate? | Plaintiffs claim they thought they were signing something other than a franchise agreement. | Signatures and accompanying documents show assent to arbitration. | No genuine dispute; plaintiffs signed and assented to arbitration. |
| Did CB Tax waive its right to arbitrate by filing a motion to dismiss for improper venue? | Waiver by litigation conduct. | Waiver does not arise from motion to dismiss; arbitration rights preserved. | No waiver; arbitration rights preserved. |
Key Cases Cited
- Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1 (U.S. 1983) (strong federal policy favoring arbitration; doubts resolved in favor of arbitration)
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (U.S. 1967) (fraud in contract formation affects validity of arbitration agreement only if fraud goes to making of the arbitration agreement)
- Sat. Evening Post Co. v. Rumbleseat Press, Inc., 816 F.2d 1191 (7th Cir. 1987) (jury trial available only for genuine disputes about existence or scope of arbitration agreement)
- Continental Cas. Co. v. American National Ins. Co., 417 F.3d 727 (7th Cir. 2005) (state-law contract formation governs whether parties agreed to arbitrate; Illinois law applied here)
- Halim v. Great Gatsby's Auction Gallery, Inc., 516 F.3d 557 (7th Cir. 2008) (waiver of arbitration rights not shown by filing a motion to dismiss)
- Continental Ins. Co. v. M/V Orsula, 354 F.3d 603 (7th Cir. 2003) (proper procedural path for Rule 12(b)(3) motions when arbitration requires out-of-district forum)
- McDonald's Corp. v. Tepp, Inc., 417 F.3d 680 (7th Cir. 2005) (arbitration provisions are standard in franchise agreements; do not render them unconscionable without more)
- Sweet Dreams Unlimited, Inc. v. Dial-A-Mattress Int'l, Ltd., 1 F.3d 639 (7th Cir. 1993) (fraudulent inducement arguments cannot override broad arbitration clauses)
- Cusamano v. Norrell Health Care, Inc., 239 Ill.App.3d 648 (Ill. App. 1993) (Illinois courts reject fraud-based efforts to avoid arbitration under FAA)
- Melena v. Anheuser-Busch, Inc., 219 Ill.2d 135 (Ill. 2006) (party signing a contract is charged with knowledge of its terms)