Greensfelder summer associate Kiran Jeevanjee contributed to this blog post.
Native American tribes occupy a unique position within the American legal system, and understanding these issues is vital for any franchisor considering a tribe as a potential franchisee. Federally recognized Native American tribes are classified as “domestic dependent nations” — meaning that the tribes are considered “distinct independent political communities” and can govern their own internal affairs. The most important consequence of this classification from a business perspective is that such tribes are entitled to tribal sovereign immunity that protects them from any civil suits or criminal prosecutions to which they did not consent.
This sovereign immunity is powerful and highly relevant: It shields all tribal officials and any tribal employees acting in their official capacity from federal common law claims and from contract suits arising from governmental or commercial activities. Because tribes are immune from contract suits absent a clear waiver of sovereign immunity, for a franchise agreement to be enforceable against a tribe, a franchisor must first obtain a valid waiver of tribal sovereign immunity. Tribes retain this immunity when doing business both on and off the reservation. Thus, this immunity applies regardless of the franchise’s physical location.
Because a tribe will be immune from legal efforts to enforce a franchise agreement absent a waiver of that immunity, the prudent franchisor should negotiate a clear and effective waiver early in the process to ensure enforceability of the final franchise agreement. Below are some simple steps to increase the likelihood that your sovereign immunity waiver will be valid and your franchise agreement will be enforceable.
The most important consideration is ensuring that the waiver is clear and obvious. A valid waiver of sovereign immunity is one that is “clear, express, and unambiguous.” Santa Clara Pueblo v. Martinez, 436 U.S. 49, 59 (1978). While there are no “magic words” that constitute a valid sovereign immunity waiver, the waiver must be affirmative and unequivocal. Franchisors should pay careful attention in drafting the waiver clause of any franchise agreement as courts otherwise typically exercise a strong presumption against a waiver of sovereign immunity. An invalid sovereign immunity waiver can nullify an entire franchise agreement and have devastating consequences on your franchisor-franchisee relationship. The more you can include to demonstrate to a court that the franchisee intended to expressly and unequivocally waive sovereign immunity, the better.
These are some effective methods for making your waiver clear:
- Use express and unambiguous language. Make sure your waiver expressly states that the tribe is knowingly waiving tribal sovereign immunity. You can increase the likelihood this will be enforceable using typical contractual drafting techniques, such as bolding the relevant language and requiring initial or signature lines for the specific provision itself.
- Include express choice-of-law provisions and dispute mechanisms. These sorts of provisions will significantly increase your sovereign immunity waiver’s chances of validity because they are strong evidence that the tribe understood and agreed that it might have to litigate or arbitrate disputes without resorting to an immunity defense. In C&L Enterprises, Inc. v. Citizen Band Potawatomie Tribe of Oklahoma, for example, the Supreme Court held that a contract signed by a tribe with a clear arbitration provision and choice-of law clause was a clear waiver of sovereign immunity. Because the tribe “agree[d] to submit disputes arising under the contract to arbitration, to be bound by the arbitration award, and to have its submission and the award enforced in a court of law,” the tribe clearly and expressly waived sovereign immunity. 532 U.S. 411, 420 (2001). Including a choice-of-law provision and/or a dispute resolution mechanism in your franchise agreement will indicate to courts that the franchisee expressly waived sovereign immunity.
- Demonstrate that the tribe has followed its own required procedures. In addition to having a clear and unequivocal sovereign immunity waiver, the appropriate tribal authority must be the one who authorizes the sovereign immunity waiver. Franchisors should consult tribal law and the tribe’s internal governing documents to determine who has the authority to waive sovereign immunity and the process the tribe must follow to do so. Typically, this is the tribe’s governing body. The franchisor should obtain certification that the appropriate authority waived sovereign immunity and consider making the certification an exhibit or schedule to the franchise agreement. If an otherwise valid sovereign immunity waiver is granted by an inappropriate authority, the franchisor will ultimately be left with an unenforceable franchise agreement. For example, in World Touch Gaming, Inc. v. Massena-Management, LLC, World Touch Gaming entered into an agreement with an unincorporated enterprise of the Akwesasne Tribe. 117 F. Supp. 2d. 271 (2000). In the agreement, the tribal entity’s vice president waived sovereign immunity, but did so without the express authorization of the Tribal Council. The court found that the sovereign immunity waiver was invalid and dismissed the case on the grounds that the Tribe was immune from suit.
Franchising with Native American tribes can be a great opportunity for both parties. However, it is important to know and to understand the sovereign immunity-related risks associated with doing business with Native American tribes. Including a clear and express sovereign immunity waiver that is authorized by the appropriate tribal authority is one way to ensure your franchise agreement is enforceable and will create a strong franchisor-franchisee relationship for years to come.