"You Made Your Bed, Now Lie In It!" Dickey's BBQ And Franchisees Stuck Litigating And Arbitrating
Takeaway: Before you enter a franchisee/franchisor agreement, try to devise an efficient and fair dispute resolution system so you don't end up in this sticky situation.
Where and how a dispute between a franchisor and franchisee must be decided can have a major impact on the outcome of the case. Franchisees generally want the case to be decided in the court where they live and by a jury, while franchisors want it decided in their city and by a private arbitrator or a judge. State regulation of franchise sales intended to bolster franchisee's rights on this issue can result in the franchisor and franchisee having to engage in both arbitration and court litigation in two different states. We explore how franchisors and franchisees might reasonably avoid that unwieldy situation.
The Maryland Securities Commissioner, as a condition of approving a registration, routinely requires franchisors to agree that its Maryland franchisees will have the right to bring a claim in a Maryland court for violation of the Maryland Franchise Registration & Disclosure Law (the “Franchise Law”) – even if the franchise agreement requires arbitration of all claims in the franchisor's home state. However, what happens when a franchisor files an arbitration demand against a Maryland franchisee in its home state, and then the franchisee sues in a Maryland court alleging violation of the Franchise Law? In Chorley Enterprises, Inc. v. Dickey's Barbecue Restaurants, Inc., the U.S. Court of Appeals for the Fourth Circuit ruled that the franchisor's claims must be decided through arbitration in Texas, but the franchisees' Franchise Law claims must be decided by a jury trial at the U.S. District Court in Baltimore.
The court's reasoning was solid and logical. Dickey's franchise agreement included a provision, specific to stores located in Maryland, stating that the franchisee had the right to sue in courts located in Maryland for claims arising under the Franchise Act. Otherwise, the agreement had a broad clause requiring arbitration of all claims arising from or related to the agreement or the parties' relationship. The court noted that Dickey's did not seek to obtain registration by the Maryland Securities Commissioner without including the litigation carve-out for Franchise Act claims, and it did not seek a court order declaring that the Securities Commissioner could not require such a carve-out from the arbitration provision. Instead, it chose to include the language typically required by the Securities Commissioner so that it could sell Maryland franchises. Accordingly, the court ruled that Dickey's “made its own bed” and therefore would have to defend the Franchise Act claim in court.
However, the decision was not a clear victory for the franchisee. The next step in the dispute will be for the U.S. District Court judge to decide whether to delay the franchisees' court case until the arbitration is completed in Texas. (The arbitration had been stayed pending the appeals court ruling.) If the court does so, then the franchisees will have to defend against Dickey's claims in the arbitration and probably present their evidence showing that the Franchise Act violations, to convince the arbitrator that the franchise agreements are unenforceable. But win or lose in arbitration, to preserve their right to have a jury trial of their Franchise Act claims, the franchisee will have to present its case a second time in court to actually get a judgment against Dickey's.
Is there a way to solve this mess going forward? Franchisors registering in Maryland probably should not include an addendum provision allowing franchisees to pursue Franchise Act claims in Maryland courts. If the Securities Commissioner demands that change, as is likely, then the franchisor should consider offering to agree that all claims (including Franchise Act claims) will be decided through arbitration, but the venue for arbitration will be in Maryland. The location of the dispute resolution is the big issue for franchisees, and having everything decided in one proceeding is ultimately to the benefit of both parties. Such a franchisor will benefit being able to avoid facing a franchisee group or class action in court and from having cases decided by arbitrators rather than court juries.
For most prospective franchisees, it would be best to negotiate away the right to bring a claim under the Franchise Act in Maryland court, if the franchisor will agree that all claims will be decided through arbitration conducted in or near Maryland. If dispute resolution is necessary, most franchisees will be better off not being stuck on “two tracks” and instead have all issues decided efficiently in a fairly convenient forum – even if that means giving up the right to have its “day in court.”